Beer and the Three Tier System – Craft Beer 102

Bottling Up Innovation in Craft Brewing (paper): Christopher Koopman and Matthew MItchell review the barriers and challenges for craft brewers.
Tax Bites (article): A breakdown of how much of goods’ prices are from taxes.
Trouble Brewing for Craft Beer (article): Christopher Koopman and Matthew Mitchell explain how regulations negatively affect craft beer brewers.

Chris, this pumpkin spice lemon scented beer is delicious, it does smell like lemon, tastes like heaven.
>> What if I told you that I had an even better recipe than that?
>> Hm.
>> But to bring the beer from Virginia and sell it to you here in D.C. would be just as difficult if I were to try to start a legitimate business in China or Venezuela.

>> Really?
>> Yeah, really. Three tier system. What’s that?
>> I think the easiest way to explain it to you would be what if I were to tell you that we passed a law today that made it illegal for Apple to sell the iPhone directly to you?
>> That’s bullshit.

>> It is, right? And the same theory would hold for beer. So there are people on one side fighting the regulation, that would be small brewers, and people who like beer, like you and me and everyone else that has a taste for craft brew. But what you have is you have distributors, and large brewers that are fighting against it.

They’re saying, well why are they fighting against what ultimately is good regulation or good deregulation for consumers and competition, and ultimately for the industry as a whole. Well they, again, they stand to gain financially from the continuation. They will lose out short term because they’ve made certain investments in building relationships with distributors.

They’ve made certain investments in building a distributorship. That they stand to lose greatly if we were to just tomorrow say no more three tier system.
>> So this is obviously hurting a lot of different people. Why can’t we get out of it?
>> The theory that explains this is what economists call the transitional gains trap.

But the easiest way to describe this is that certain people have built their business model around these regulations and certain people have incurred a lot of costs as a result of these regulations. So if I’m a distributor I’ve built my entire business around the idea that brewers have to sell their beer through me.

If we deregulate the industry and no longer make it mandatory that brewers sell through me as a distributor, I lose my business. So I have a financial interest in seeing that these things remain in place because I’ll ultimately lose long-term if they don’t stay there.