Three Essays on Craft Beer and Craft Breweries

Chapter 1 empirically estimates the effects of vanity and quality on the demand for craft beer. While large “macro” breweries have historically dominated the US beer industry, the industry has seen a significant rise in smaller “craft” breweries. Two possible sources of consumer preferences leading to the growth of craft breweries’ beer have been forwarded. The first, quality, suggests that craft beers are simply better. The second, what I term “vanity”, suggests that the non-macro image and branding increase consumer utility. The goal of this paper is to disentangle empirically these two sources of growth. Data on beer sales, prices, and beer brand characteristics from six U.S. cities is combined with brewery ownership data and a quality measure of beer derived from a popular beer rating site. One cannot measure consumer preference for craft beer directly. A negative coefficient on craft branding shows up in past analyses because, by definition, craft beer has a substantially smaller market share than macro beer. To capture craft beer’s vanity effect, I exploit the fact that within the dataset some macro breweries produce craft beers. This allows me to compare beers with similar market shares. Splitting up craft beer into true craft and macro craft, I find consumers prefer the former to the latter, showing a vanity effect of true craft beer. Overall, both quality and vanity have been driving craft beer growth, but vanity has a larger impact than quality. Chapter 2 empirically estimates the effect of on premise beer sales on the number and production of microbreweries. Many states in the US use a three-tier system for beer distribution. Under a three-tier system, breweries must use distributors to get their products to consumers. Recently, macro breweries have begun trying to vertically integrate with some of their distributors. This paper looks at the competitive effects of vertical integration on craft breweries. To model the three-tier system, a Bertrand competition model with product differentiation and heterogenous firms is used. This paper finds when a macro brewery vertical integrates, fewer craft breweries enter the market. Also, the vertically integrating macro brewery forecloses on craft breweries when there are only two distributors in a market. Lastly, vertical integration decreases consumer welfare when there is low product differentiation. Chapter 3 builds a theoretical model to look at the competitive effects of vertical integration on craft breweries. In the beer industry, states control their beer regulations. On premise beer sales allow craft breweries to operate an onsite tap room at their brewery. Allowing on premise beer sales gives microbreweries the opportunity to increase their profits and build their brand in a highly concentrated market. Since 1989, 33 states have passed laws to allow on premise beer sales. This paper looks at how on premise beer sales affects the number and production of microbreweries, a type of craft brewery. A difference-in-differences approach is used to measure the effect on premise beer sales has on microbreweries. Allowing on premise beer sales increases the number and production of microbreweries. Passing an on premise beer sales law leads to an immediate increase in the number of microbreweries and an eventual increase in microbrewery production. States who have not passed on premise beer sales will see an average increase of 4 microbreweries and an average increase in production of microbrewed beer by 35% if a state passes an on premise beer sales law