Markups and product differentiation in the German brewing sector

Abstract

In this paper we provide a method to separate the product differentiation markup from other sources of market power, i.e. collusive behavior or lack of market transparency, based on the estimation of a single reduced form equation. We apply this method to a sample of about 200 breweries in Germany, since beer is a differentiated product and at the same time the sector has repeatedly been suspected to show collusive behavior. Our empirical results show that a significant part of the estimated markup is due to product differentiation. This is especially true for beers produced in Bavaria. However, there are other important sources of imperfect competition. Markups are higher for large firms and increase over time. In addition, we observe increasing returns to scale and average costs above marginal costs. Hence, in the German brewing sector a high markup does not necessarily translate into a high profit margin.