(Bloomberg Opinion) -- If you’ve ever wondered why beer prices diverge so widely across Europe — from as little as 60 euro cents ($0.67) for a half-liter bottle of a local brew in the Czech Republic to 2.1 euros and more in Ireland — the European Commission’s decision this week to fine Anheuser-Busch InBev NV provides an important answer. The company, the world’s biggest brewer, must pay 200 million euros ($224 million) for market power abuse. The ruling, however, only scratches the surface of a major issue with Europe’s single market: its inability to ensure price convergence.
The AB InBev case, which the commission began investigating in 2016, is relatively straightforward. In Belgium, the company’s Jupiler beer accounts for about 40 percent of all beer sales by volume. AB InBev was able to charge a higher price there than across the border in the Netherlands, where the beer market is more competitive. To keep Belgian retailers from buying Jupiler in the Netherlands — there is, after all, no customs border between the two countries — AB InBev leveraged the EU’s food safety rules, which require any obligatory labeling to be easily understood by consumers in the country where the food is sold. The brewer removed the French version of the mandatory information from the Jupiler bottles sold to Dutch drinkers. It also limited the amount of beer it would sell to Dutch suppliers. (AB InBev cooperated with the investigation, had its fine reduced and isn’t appealing).
There’s almost certainly more such behavior across Europe — the EU just hasn’t been able to catch others at it.
There are three obvious reasons beer prices can differ among European countries. One is that tax regimes are not uniform. Value-added taxes vary from country to country. So do excise duties, reflecting a divergence of attitudes toward beer — from permissiveness and preferences for small craft brewers where it’s a national drink, as in the Czech Republic and Germany, to considerable harshness, especially toward stronger brews, as in Nordic countries.
But the pretax prices also diverge widely. Researchers who have studied food price differences attribute them, among other reasons, to consumption habits and wealth levels that diverge from country to country. The beer price is negatively correlated with a country’s consumption level and positively correlated with per capita income. Crudely put, in a wealthy country that drinks less beer, a bottle of lager will be more expensive.
These two factors, however, explain about half of the variance in pretax beer prices. That’s both a lot and not enough. Mass-market lager is a relatively simple product in terms of ingredients, the investment required to make it and the amount of labor needed (the economies of scale are large). The rest of the variance must be explained by influences that aren’t as easy to parse, such as Europe-wide wholesale and retail infrastructure — and the competitive landscapes that shape big brewers’ ability, or lack thereof, to shape prices, as AB InBev did in Belgium. Even on a continent without internal borders, what should in theory be a perfectly competitive market often isn’t, as this case demonstrates.
In fact, prices can diverge widely across the EU. According to Eurostat data, the price levels of consumer goods consumed by households in 2017 differed from 70% of the EU average in Bulgaria to 127% in Denmark. The variance was higher in 2017 than in 2008, though income levels across the EU continued to converge during these years.
In a paper published last year, Alexandra Halka and Agnieszka Leszczynska-Paczesna of the Polish National Bank showed that price convergence in the EU, while evident before the global financial crisis, came to a virtual stop in 2009. They attributed this in part to more domestic market protections after the crisis; even in the EU, protections are possible relative to other member states, mainly through tax regimes — as with beer excise duties, for example. But the absence of price convergence is also a sign of the EU’s problems in dealing with other distorting factors, including the market power of retailers and major producers. Rulings such as the AB InBev one help, but similar problems exist in too many markets to take simultaneous action in all of them.
According to the latest Eurobarometer survey, “rising prices” are on the list of the most pressing issues facing the EU. Creating a more level playing field for businesses and thus driving down prices has been an underappreciated EU function, and it could use more attention. Thanks to the AB InBev ruling, Belgian beer drinkers should be able enjoy cheaper Jupiler, but other artificial price imbalances are still there.
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Leonid Bershidsky is Bloomberg Opinion's Europe columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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