Markets in Action

Answer

Markets in Action: Monopolies and the Effects of Government Policies

Nature and Characteristics of Anheuser-Busch InBev (AB InBev)

            AB InBev is a beverage company specializing in the sale of beers and soft drinks across the world. Having started in 2008 as InBev beverage company, it has grown through mergers with different beverage manufacturing companies to become the largest beer manufacturer in the world (Rodeick, 2017). Currently, the company can best be described as a monopoly in the US alcohol market since it controls over 45% of the market share through its 500 brands of beer (Roderick, 2017). As of 2016, its annual revenue was USD $45billion. In order to grow its market share, the company has always merged and taken over smaller beer manufacturers but have had to be limited by government policies and regulations in order to allow for fair competition in the markets they operate-especially in the US.

Market Structure of the US Alcohol Market

            The US alcohol market is typically three-tier and therefore a business can either be supplier or importer based, distributer or wholesaler based or simply retail based. According to the US government, this three-tier system is guided by the need to ensure fair competition and therefore, if one chooses to be in either of the three business types, they are limited to the selected types, unless as direct otherwise by the individual state laws (ASE, 2012; Elias, 2015). This difference in regulation at the state levels leads to two classifications of states: Open and Control State. Open states allow private entities to retail alcohol while in control states, alcohol is retailed and distributed by state agencies (ASE, 2012). US alcohol market is regulated by four bodies: Food and Drugs Agency that sets the safety standards of the products, Tobacco Tax and Trade Bureau (TTB) that ensure correct labelling and safety standards of alcohol before sale, Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) that enforces alcohol laws in case of violations and Federal Trade Commission (FTC) that monitors marketing strategies used by alcohol companies in advertising their products (ASE, 2012).

Reasons why Government May Influence Markets

            The government in any market remains one of the main regulators of business. One of the reasons that may cause a government to influence a market is to ensure public safety through ensuring the products on sale are safe for consumption (Elias, 2015). For food based markets like the alcohol market, this is mandatory and thus, several regulators can be appointed to monitor and enforce the set regulations. This would ensure consumers receive quality and safe products. In other cases, the government may influence in order to ensure fair competition. One of the ways include: dividing roles within the market and limiting businesses to their chosen roles like is the case in the US three-tier system. This prevents monopolies and ensures that the customer has variety to choose from, they can choose a product based on their spending abilities, they are exposed to the best quality products and are able to access products conveniently (ASE, 2012). The government may also influence a market in order to control prices and prevent exploitation of consumers. Price controls are mainly through policies.

When demand in a market equals the supply, the market is said to be at a state of equilibrium. In most cases, government policies on costs tend to support a state of disequilibrium where the amount of products exchanged in the market is determined by lesser amount demanded or supplied. For instance, demand will determine the amount of products and services transacted if it is less than the supply: the remaining products that are not supplied will remain with the supplier. Alternatively, the government may set a price floor or the lowest price for which a specific product can be sold and this can be within the equilibrium, below equilibrium or over the equilibrium (Philibert, 2009). When the price floor is below or within the equilibrium, Philibert (2009) states that the free-market environment can be attained. However, when the price floor exceeds the equilibrium, product prices will be higher, supply will be more than the demand and thus there will be need for a third party to offset the excess (Philibet, 2009). This is described as a binding price floor. Another form of control by governments is the use of price ceilings or the highest amount for which specific goods should be cost (Coyne & Coyne, 2015). Ceilings extend even to rental properties and help to control exploitation of buyers in specific markets.

Real-Life Government Intervention

            With the new administration in the US, her government plans on increasing import taxes on imported products-mainly manufactured abroad as a measure towards promoting local manufacturing (Karsten, 2017). This intervention is aimed at encouraging local manufacturing for job creation in the country.

Price Elasticity of Demand and Supply

According to Elberse (2002), as long as demand remains constant, an increase in the price of a product always causes a buyer to seek alternatives. In most cases these alternatives are normally affordable. Nonetheless, in case the income levels of buyers’ increase, the price of the product will likely remain high as demand for the products remains high (Syrovatka, 2006). Elberse (2002) added that if the price of a product in a market is high, buyers tend to purchase less of the product and thus producers would have high supplies within their stocks. In this case, when the US government successfully imposes higher taxes for imported products, the price of products from abroad will be high causing demand for locally produced alternatives.

Benefits and Disadvantages of the Intervention

For AB InBev, this would mean losses in terms of the imported beers to the US and thus, promotion of the locally produced brands to meet the demand for beer that was initially available. The company’s revenues will fall. However, competitors producing locally will increase their sales as their beers are more affordable. This would mean an increase in market share for the smaller producers and a decline in the monopoly by AB InBev. Later, if AB InBev is able to increase its local production, it can retain its shares after some time.