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Worldcrunch

Beers And Monopolies - Don't Mess With Corona

Article illustrative image Partner logo Cheers!

SANTIAGO - The recent decision of the U.S. Justice department to block the acquisition of Mexican beer giant Grupo Modelo by the Belgian Anheuser-Busch InBev came as a surprise.

The $20 billion acquisition was announced last June, and what’s surprising is that neither company involved is technically an American company.

Belgium-based multinational AB InBev is the largest brewer in the world. It was formed in 2008, when Belgium-Brazilian InBev bought American brewer Anheuser Busch. InBev was formed four years earlier, when the Belgian Interbrew and the Brazilian Ambev merged. Ambev had itself been formed by an earlier merger between Brazilian beer brands Antartica and Guarana, giving the Brazilian company a near monopoly on beer sales in Brazil and a huge portion of the South American market. 

Grupo Modelo is the largest brewer in Mexico and also has a significant portion of the market share in the U.S., thanks to the success of Corona, America’s number one imported beer. AB InBev already owns half of Grupo Modelo. The U.S. wants to prevent it from buying the other 50%.

What right does the U.S. have to prevent the merger between two foreign corporations? After the acquisition, AB inBev would control more than 50% of the total U.S. beer market, which would allow them to manipulate prices and hurt consumers. The U.S. government is not using anti-trust laws to prevent the acquisition, because it doesn’t have jurisdiction. Instead, it is asking the courts to decide whether the merger should be stopped because it will make price collusion easier, which would hurt U.S. consumers.

It might seem like this case is not relevant to Latin America, but it is, and not only because AB InBev has its hands in Brazil, the third-largest beer market in the world. The truth is that the U.S. market is not the prize in this acquisition - it is Mexico. By buying Grupo Modelo, AB InBev is doing the same thing it did in Brazil – buying the dominant company and then increasing margins by reducing costs.

Fighting monopolies and price collusion

The case is a good example of the complexities involved in globalization. It’s not enough if companies have anti-trust laws as long as some countries – Ecuador and Guatemala come to mind – don’t even have an agency to enforce those laws.

Price collusion tends to happen in small economies where it is difficult for several companies to compete in the same industry. Chile, for example, has a market economy with clear anti-trust laws that are actively enforced, but in spite of that it has had several cases of price collusion in the past couple years. There has been collusion in the price of medicine, for example, which is probably caused because almost all the pharmacies in the country are owned by three companies.

In market economies, the state has the responsibility for making sure that no company has monopoly power. When an industry depends on government concessions for its operations, the government has the responsibility to issue enough concessions to allow real competition.

In both Mexico and Colombia, industries like telecommunications and television are essentially monopolies. The airline industry is another one that certainly needs increased competition.

The U.S. Department of Justice is right to say that the absorption of Grupo Modelo by AB InBev will make the prices go up and paralyze innovation. But Mexico should have been the one standing up to the merger, not the U.S. And that would have happened if the Mexican government was more committed to protecting competition. 

The lesson for all of Latin America is that each country should strengthen its defenses against monopolies. At the same time, countries should standardize their practices, so that what is unacceptable in one country will also be unacceptable in another.

Coming back beer – If AB InBev ends up rescinding its acquisition offer; it will have to pay a $650 million breakup fee. If it goes ahead with the deal, it can look forward to a long and costly battle with the U.S. Department of Justice. But the lesson is that when there are mergers that will allow price manipulation, the consumer defender can pop up from the most unexpected places.

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About this article source Website: http://www.americaeconomia.com/

America Economi­a is Latin America's leading business magazine, founded in 1986 by Elias Selman and Nils Strandberg. Headquartered in Santiago, Chile, it features a region-wide monthly edition and regularly updated articles online, as well as country-specific editions in Chile, Brazil, Ecuador and Mexico.

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