Pur Autre Vie

I'm not wrong, I'm just an asshole

Sunday, January 04, 2015

Beer and Public Policy

One phenomenon that is quite interesting to me is the huge increase in the number of breweries in the United States in the last few decades, which has occurred against a backdrop of declining beer consumption.  (I am too lazy to look up the data, but the increase in the number of breweries is beyond question.  I am not quite as confident about declining beer consumption, though that has definitely been reported in recent years.)

One way to think about it is this.  Imagine that each beer drinker has preferences that can be mapped in n-dimensional space.  For simplicity, let's pretend there are just 2 dimensions in beer preferences, since I'm pretty sure the results will generalize from there.  Just for concreteness, let's say the 2 dimensions are concentration of alcohol (ABV) and hoppiness (measured in international bitterness units, or IBUs).  And let's say that people's enjoyment of the beer diminishes as a function of the distance from their ideal point on the grid.  (So in other words, an individual's preferences are single-peaked.  I'm not sure this matters, but anyway I don't think the assumption does any harm.)

So you could generate a graph of people's preferences, with aggregate satisfaction on the z axis and ABV and IBUs on the x and y axes.  The result would be some kind of surface vaguely resembling a hill or mountain range.  There's no way to guess what this shape might be a priori (and remember, it's a highly simplified example to begin with), but if tastes are fairly stable, then there should be a peak on the graph where you can maximize the aggregate enjoyment of a brand of beer.  Of course there are other considerations - maybe hops are really expensive, maybe ABV is taxed or regulated in such a way that the brewers don't optimize that dimension purely in terms of consumer tastes.  And on top of that, it may be more profitable to brew an inoffensive beer (one that is acceptable to the highest percentage of drinkers) rather than a satisfaction-maximizing one.

But whatever considerations end up mattering, if there is only one brand of beer, it is going to be pretty far away from a lot of people's preferences (assuming there is much diversity of tastes).  And what happens as you add more brands of beer?  Well, this is a very complicated question, but one possibility is that the brands will cluster together for Hotelling's Law reasons.  So we might observe Budweiser, Miller, and Coors all brewing beers with similar characteristics, even though those beers are redundant in terms of preference-satisfaction.  And in fact, that's what we observed for years.  (This may be a good result for some beer drinkers, by the way.  If your tastes are well-served by weak lager with minimal hop character, then the intense competition around that point on the graph will keep prices low while giving you exactly the beer you want.  Other beer drinkers, though, are likely to regret that all of the major brands are focusing on a part of the graph far from their ideal style.)

Now, it's somewhat mysterious to me why that equilibrium persisted for as long as it did.  I'm no beer historian, but as far as I can tell, from the end of Prohibition (in 1933) to the advent of "microbreweries" in the early 1980s, there were very, very few brands of beer available in the United States that skewed very far from the light lager template.  Even imported beers were typically light lagers (think Heineken or Corona), with the notable exception of Guinness stout.

But then everything changed.  Brewers entered the market with beers that were very, very far from the existing cluster of mega-brands (a region of the graph in which no small brewer could hope to compete, I would think).  They brewed hoppy beers.  They brewed high-alcohol beers.  They brewed hoppy, high-alcohol beers.  And they experimented on dozens of other dimensions.  And in general they found a great deal of success, at least in the aggregate.  Individual breweries have failed, but "craft" breweries (which generally refers to small breweries making flavorful products) are commanding more and more of the beer market.  Certainly by the mid-90s the trend was noticeable, and in the last decade it has become utterly obvious.

And so if you think about our map of beer preferences, a much larger area of the map is being served by the U.S. brewing industry.  There is no plausible case that Hotelling's Law still applies on a large scale (though there may still be clustering within some regions of the graph).  There has been a profusion of styles readily available to U.S. beer drinkers.

It's fun to think about why things played out this way, and specifically why it took so long to shake off the old equilibrium.  One possibility is that beer drinkers had to be "educated" to enjoy certain styles of beer, which would explain the long gestation period and then (relatively) sudden explosion of interest in craft beer.  Another possibility is that Americans didn't have enough disposable income to pay the high prices commanded by craft beer.  (This is a little implausible as a full explanation, because plenty of European countries enjoyed a range of flavorful beer styles despite having less per-capita income than the U.S.  But it could be a partial explanation of the sticking power of the light lager equilibrium.)  Yet another possibility is that American brewers lacked the know-how to brew more interesting styles.  (In this account, Jimmy Carter's legalization of homebrewing in 1978 was the major turning point, because homebrewers learned to brew all kinds of styles as a hobby and then inevitably some of them went into business as microbrewers.  Certainly that fits the timeline, and I believe it's true that many of the early microbreweries were founded by homebrewers.)

Probably all of these things were factors.  I've kind of run out of steam, though, without building to any kind of coherent point.  I think what I was originally going to say was, whereas the marketplace can (in the right circumstances) allow for a kind of pluralism, in which a wide diversity of preferences are satisfied, the same is not true of public policy, where quite frequently you have to do the equivalent of brewing a single brand of beer for everyone.  And this means that you don't have the luxury of dismissing anyone's concerns, however idiosyncratic they might be.  So for instance, if someone complains to me that he only likes hoppy beers, then I will have no sympathy - his needs are abundantly satisfied by the market.  But if someone complains that he can't function in a society where gambling is legal, then I can't just tell him that he should stay out of casinos.  He knows that, but he can't control himself.  There may be a public policy that addresses his concerns while allowing other people to gamble (for instance, "pre-commitment," in which a gambler voluntarily puts his name on a list of people who aren't permitted to enter the casino).  But the point is that if you have to pick a single point on a graph, the choice becomes much more fraught and tragic than if you can simply allow a thousand flowers to bloom.