Pricing in the Land of Beers

Belgium prides itself on being “The Land of Beers.”  A Belgian student tells me that this pride leads to some unusual pricing policies among the less well-known breweries.  Apparently, many charge a higher price for their products when they are sold within the local area around the brewery, since people are proud of their local brand.  This is a clear example of demand-based price discrimination.  The average cost of selling locally is probably below that of selling elsewhere (lower transportation costs); but locals’ pride in the native tipple gives the brewers some monopoly power, which they are happy to exploit.  The brewers are made better off (higher profits) by the locals’ behavior; and the local people must be better off, otherwise they would choose different brews.

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  1. dabeir trinket says:

    how are the locals better with higher prices? better off than what?

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    • Daniel Dickison says:

      Better off in that they are happier believing they are supporting the local economy, home team pride, and what not.

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      • John says:

        The willingness to pay for the local beer will be higher than that of other beers for the reasons that you say, but it’s a huge leap to say that local people are better off.

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      • dabeir trinket says:

        if the locals are drinking beer at high prices, they would also drink the beer at low prices. charging a high price is not a win-win. it is just a win — for the firm.

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      • Steve O says:

        @dabeir: you are exactly right. The locals (whatever percentage or quantity you take that to mean) would presumably buy the beer at any price below the price they’re already paying, so the difference is a transfer of consumer surplus to producer surplus.

        However, Hamermesh is referring to the perceived value of a good with a higher price. I.e., the locals are happier paying more because of the pride they have in their local brewery and their community. It’s pretty well documented that people believe they enjoy food and drink more when they pay more for it.

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    • RPM says:

      The locals may be better off socially, among their friends or relatives employed by the local brewer, who expect them to buy the local product.

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  2. Eric M. Jones says:

    “…The average cost of selling locally is probably below that of selling elsewhere (lower transportation costs)”

    Buying a pineapple in Hawaii is expensive. A good cup of coffee in Costa Rica will cost you dearly. There must be myriad other examples…due to giant distributors or processors buying up all the local product. So local markets get squeezed. Transportation costs are a trivial part of this because the Giants negotiate for lower prices that easily cover higher transportation costs.

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    • Jerome Solanum says:

      The cost of quinoa in the Andes is another good example.

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    • jaqueh says:

      cost of clothes and shoes in china??? in particular nike…

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    • RPM says:

      It’s crazy, isn’t it? In many less developed countries, the local product is often sold locally with a label saying “Export Quality”. The assumption being that otherwise, the locals get stuck with the product rejected by the exporters.

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    • JoelP says:

      Pineapples are expensive in Hawaii because it’s expensive to ship them in from California.

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  3. Erik says:

    This happens in the US too, though the motivation is nominally different. Buying brewery-direct is often more expensive than buying from a retailer, with the brewery pocketing the markups that would normally be paid to the wholesaler and retailer. Brewers defend this practice by saying it would be suicide to undercut their retailers. I’m not so sure–are many beer shoppers so price-sensitive that they’ll drive many miles to a brewery with limited hours and a single brand to save a buck a sixpack? My sense is that it’s simply a good story and everyone is happy to play along since it allows higher prices and brewery visitors still get warm-fuzzies.

    Btw, Maredsous (pictured) is brewed by Duvel Moortgat, which produced over 7 million barrels across a number of brands in 2010. That’s still small from a global standpoint, but for comparison, Boston Beer Co/Sam Adams and Yuengling each have an annual production of closer to 2M barrels.

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  4. m.m says:

    This is similar for many small wineries in the US (I’m thinking particularly of NYS). They sell their wine at full list price in their tasting rooms, while any wine they sell elsewhere through distributors is essentially sold at cost. Those off-site sales are basically marketing, not revenue.

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    • Chad says:

      Some wineries here in California charge more at the winery because they would rather have you purchase the wine in the store – the distributors and stores wouldn’t continue to carry the wine if people just drive to the winery and buy it for cheap.

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  5. Chris Benten says:

    Samsung (and probably other Chaebols) practice this discriminatory pricing also. However, one way of looking at this issue, learned in Managerial Accounting, is to cover all fixed costs with local pricing and only variable costs go into external pricing with excess production capacity. This was the Asian argument when accusations were flying about “under cost” pricing a few years ago.

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  6. Michelle says:

    The same thing happens with oil refineries. Gas prices are more expensive in towns with oil refineries. Partly it has to do with local taxes, but gasoline stations controlled by the refineries have priority and set the base price for the town’s average cost of gas.

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  7. jobu babin says:

    ‘otherwise the would choose different brews.” Not exactly…in the minds of locals, there are no other brews.

    Essentially, local breweries in Belgium, and many parts of Germany are local monopolies…reminds me of some work by Jared Diamond. The municipalities are better of because of the lack of competition ensures a quality product, and mass produced beer as it exists in the competitive US market is simply a different good altogether (because of differing price elasticities and demands for product freshness and identity).

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  8. Kyung Rae Kim says:

    Great point. Completely makes sense. In pricing, it is about willingness to pay and what the market will bear. In this case, there is higher willingness to pay.

    Perhaps a great example why “cost+margin” is such a basic and poor way to think about pricing. Thank you again.

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