Why are they making my beer more expensive?

Pressure from parliament has led to supermarkets finding a way to collude and increase prices for alcohol sales. That is what I read from this article in the Herald.

Of course it is being framed this way so that it sounds like a winner:

The two big supermarket chains say they have stopped selling alcohol below cost as a “loss leader”, after claims the cheap deals lead to alcohol abuse

What a load of rubbish.

As long as the tax associated with alcohol consumption represents the costs and benefits (a hard issue as has been discussed in many places) then we don’t need to fluff around with this type of rubbish – as the price would represent market competition AND the social cost, thereby implying that the choices being made are in the social interest. But instead, in order to seem hard on something people view as a vice supermarkets have been pushed into a situation where they can collude in order to increase profits.

How? Well, it is true that alcohol is being treated as a loss leader. But its effectiveness as a loss leader depends on the price charged by the other firm. Under the guise of “the social good” the supermarkets have been able to agree to both increase prices slightly – keeping the relative “loss leader” advantage while making more money off alcohol sales.

It just goes to show – when people start getting the government to pressure firms based on the arbitrary morals they want to force on society, we will end up being taken advantage of by someone. I want my cheap beer back …

UpdatePaul Walker and Brad Taylor both have good posts on the issue.  Starting from this comment Agnitio brings up interesting points regarding how to view the socially optimal price in this setting – his criticism of my view is very good, even if I don’t agree with it yet (you can tell it is a good criticism because my defence isn’t very clear – the best I can do is say that it is a transfer from producers to beer consumers, but the GE impact is foggy).

34 replies
  1. rauparaha
    rauparaha says:

    The government are paternalistic and it’s a demerit good. They’re just trying to do what’s best for you by restricting how much alcohol you can buy. They don’t expect you to understand but don’t worry, Uncle John’s here to tell you what’s best 😉

  2. Matt Nolan
    Matt Nolan says:


    To be fair it was actually the opposition going on about restricting liquor sales – the government should have nipped it in the bud though, as they were able to give supermarkets this opportunity 🙂

  3. What would Hayek say
    What would Hayek say says:

    How about a complaint to the commerce commission for collusion and cartel behaviour.

    I recall an Adam Smith quote “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Wealth of Nations Book 1, Chapter X.

  4. steve
    steve says:

    I agree that this could be collusion. if I had more time I would write a letter to the Commission.

    BUT, i heard Paula Bennett (I think) discussing that it is illegal for them to sell below cost, because it is illegal to encourages alcohol abuse(or something along those lines, 10 points if someone actually finds the legislation). But therefore couldn’t they still be loss leaders, but only on premium products?

    Alcolohol abusers are likely to only buy cheap alcohol, i.e. cask wine, double brown, $6 bottles etc. therefore any loss leader such as premium wines or premium beer (so long as it is more expensive than the cheapest non-loss leader) is not actually breaking this law?

    Its all well and good to stop loss leaders on low cost liquor because it encourages alcohol abuse, but please don’t stop discounting those $20 bottles of wine down to about $12 – If they stop discounting those, then it really is cartel behaviour.

  5. agnitio
    agnitio says:

    Just to play devil’s advocate (I’m not particularily happy about this policy either, I love cheap beer)…

    As long as the tax associated with alcohol consumption represents the costs and benefits (a hard issue as has been discussed in many places) then we don’t need to fluff around with this type of rubbish – as the price would represent market competition AND the social cost, thereby implying that the choices being made are in the social interest

    My undestanding of a loss leader is that the supermarkets are effectively cross-subsidising beer to boost their sales of other products. If the MC of a beer is $1 and the additional social cost (and thus the excise tax) is $1, we have a total social cost of $2. If the supermarkets are selling beer for $1.50 would that not lead to excessive consumption from a social standpoint? The tax may be set at the socailly optimal level but the supermarkets either absorb part of it or raise the price of other goods meaning that actual beer consumption will not reflect the social costs and benefits.

    I realise that my example is overly simplistic, had to fit this comment in while eating lunch:D

  6. Matt Nolan
    Matt Nolan says:


    Interesting – so the complementarity between alcohol and other products is seeing it being sold below the full social marginal cost.

    However, complementarity states that selling more of one product increases demand for another product – it increases the marginal benefit of consuming other things (in this case because the transaction cost of purchasing would be lower once you are committed to the supermarket). I’m not sure we can ignore this persee.

    If we are going to say that beer isn’t being charged at its full social cost, we are ignoring the foregone benefit for the other good – this is an opportunity cost isn’t it. So in your case when we take this into account the effective marginal cost may only be $0.50c – and so we shouldn’t try to push up the price of alcohol.

    That is the problem with trying to evaluate welfare in a partial equilibrium framework – we miss inter-relationships like this. That would be the way I would see it.

  7. agnitio
    agnitio says:

    @Matt Nolan

    I think the complicated thing here is exactly what type of complimentarity we are talking about. Are we talking about beer sales increasing the demand for other products on an aggregate level (I certainly eat more pizza/corn chips/junk when I’ve been drinking!), i.e an actual complimentraity between two products. In this case it may be optimal to subsidise beer as you point out.

    Or the complimentarity that supermarkets observe on a individual level in that if you are get ppl too buy beer from you, you get all the other pruchases they were going to make anyways. In other words pricing beer cheaply doesn’t actually increase demand for some goods, it just reallocates it between firms (business stealing vs market exapnsion). In this case beer is being subsidised to increase the supermarket’s residual demand curve for other products without neccesarily increasing market demand for thsoe products. Here it may not be socially optimal to subsidise beer (even though it is privately optimal for the firm to do so).

    Obviously there will be elements of both effects going on which would make it an extermely complicated welfare analysis, certainly too much for me to do while eating this muffin:D

    Is this policy effective from today? might have to stock up on some cheap beer if it isn’t too late:D

  8. Matt Nolan
    Matt Nolan says:


    Indeed. So you are saying that firms are facing a “prisoner’s dilemma” situation where they over compete on the price of beer given its ability to increase firm level demand for other products.

    But I just don’t know if we can take the single firm private marginal cost of production for that product and say that if they are selling it for below that it is suboptimal – as the single product supply curve has to include “opportunity cost”, and if we don’t include that we don’t really have the marginal cost. In other words, the appropriate relative price does depend on the goods interaction with other goods doesn’t it.

    Note that in this case the prisoner’s dilemma ensure that firm profit is lower – they sell beer for less and don’t make anything extra in the other markets. So beer prices are definitely lower than they would be in the collusive case. But if we are taxing all externalities it could still be welfare optimal.

  9. agnitio
    agnitio says:

    I’m not saying we should ignore the “opportunity cost”, more just that the prisoners dilema may be enough to lead to P<MSC (which includes the operational cost of production, opportunity cost related to demand complimentarity and the “social cost” of drinking) given that firms also take into account a busniess stealing effect (which leads to a prisoner’s dilemma).

    It’s definitely privately optimal for them to get out of this prisoner’s dilema, there is no doubt about that. I’m just interested in the idea that this collusion may be actually be socially optimal.

    Privately it definitely isn’t optimal for me 🙁

  10. Matt Nolan
    Matt Nolan says:


    Not optimal for me either 🙂

    My only issue is that if we have a prisoner’s dilemma there must be market power and profit taking – that is why we have a loss leader situation in the first place.

    So it comes down to exactly what we think is going on. I agree that a loss leader situation leads to a lower price – and therefore higher consumption. But if we had, say, a linear externality, then the tax captures the full social non-private cost of alcohol consumption.

    So this just leaves us with the fact that when the tax is removed they are selling it below marginal cost because of competition. As the price of other goods remain unchanged, this implies to me that the entire surplus from this consumption is going to alcohol consumers – and it is coming from supermarket owners. Which essentially makes this a transfer – the super-normal profits from selling other goods are being transfered to people who buy alcohol as a result of the loss-leader policy. Without providing weights I don’t know how to evaluate the welfare implication of that.

  11. Paul Walker
    Paul Walker says:

    Nice post, Matt. The point I make here is basically about collusion,

    “But under the Commerce Act collusion is illegal. What are the Commerce Commission going to do about this? If Matt, and the rest of us, want our cheap beer back, then a complaint to the Commerce Commission seems in order.”

  12. Matt Nolan
    Matt Nolan says:

    @Paul Walker

    Indeed. The only problem is it is tacit collusion that is supported by politicians – that is a notoriously difficult thing to move.

    I think I will have to do some field research on the price of beer this weekend to figure out what is going on 😉

  13. agnitio
    agnitio says:

    maybe the supermarkets should file an authorisation if they think the social benefits of raising alocohol prices outwiegh the negative effects of collusion:D

  14. Matt Nolan
    Matt Nolan says:


    Why would that be in the supermarkets interest? It is in their private interest to collude afterall. Or does file an authorisation mean something different than I’m picking it up as?

  15. agnitio
    agnitio says:

    An authorisation is basically getting the CC to sign off on something that is anticompetitive but has net public benefits.

    That’s what they were going to do to create Fonterra before the government passed special legislation. Another merger example would be when Whakapappa and Turoa ski fields merged.

  16. rauparaha
    rauparaha says:

    Is this really a case of collusion, though? I thought there had to be intent in order to count as collusion, and there’s no evidence of that. It may result in the same outcome as collusion, but I doubt that makes it illegal. agnitio???

  17. rauparaha
    rauparaha says:

    But it wouldn’t be tacit collusion: that’s just where they don’t explicitly agree to collude. It’d be an outcome like collusion that they didn’t collude to get to.

  18. Matt Nolan
    Matt Nolan says:


    Huh? Are we talking about them both increasing prices based on government pressure.

    I would term that tacit collusion – I would say that the government pressure provided a focal point (or more likely reduced the chance they would get in trouble for collusion) and so led to them moving for the collusive outcome.

  19. rauparaha
    rauparaha says:

    I totally agree that it might move them to the collusive outcome. But if there’s no intent to behave in an anti-competitive fashion then is it collusion?

  20. Matt Nolan
    Matt Nolan says:


    Yes. Even if it is just an implicit movement that they do because “it works good” it is still anti-competitive. It can be anti-competitive even if they don’t realise it – for sure.

  21. rauparaha
    rauparaha says:

    Interesting. I’m surprised that it is an offence with strict liability, though: it just seems too serious for that at first glance.

  22. Matt Nolan
    Matt Nolan says:


    Sorry I don’t think I quite followed you here as I can be a bit slow at times 🙂 .

    I don’t think we can prove intent – so we couldn’t fine the supermarkets for tacit collusion in this case. However, the CC could become involved in working on the market structure as a result of the tacit collusion methinks.

Trackbacks & Pingbacks

  1. […] Further in the study of Political Beerconomy, my friend Brad Taylor has a piece titled Bootleggers and Baptists which links to a post at the Visible Hand in Economics where Matt Nolan asks Why are they making my beer more expensive? […]

  2. […] Liquor pricing, Glengarry, social ills, product availability, supermarkets by adamsmith1922 Matt Nolan commented on the 2 main supermarket chains colluding over alcohol pricing and their citing social factors to excuse their collusion. […]

  3. […] on alcohol retailing provides this “beautiful” quote (FYI this follows on from a previous post): The end of loss-leading was welcomed by Glengarry product manager Liz Wheaden, who said the […]

  4. […] TVHE » Why are they making my beer more expensive? […]

  5. […] Matt Nolan at The Visible Hand in Economics points to an interesting variation of the bootleggers and baptists logic. The two major supermarket chains here in New Zealand have agreed to stop selling alcohol as a ‘loss leader’, citing public concerns that cheap alcohol leads to abuse. As Matt points out, this is nothing but collusion allowing the supermarkets to increase their profit at the expense of consumers: How?  Well, it is true that alcohol is being treated as a loss leader.  But its effectiveness as a loss leader depends on the price charged by the other firm.  Under the guise of “the social good” the supermarkets have been able to agree to both increase prices slightly – keeping the relative “loss leader” advantage while making more money off alcohol sales. […]

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