Monopolistic Competition: Competition among Many

1.1. Case in Point: Craft Brewers: The Rebirth of a Monopolistically Competitive Industry

In the early 1900s, there were about 2,000 local beer breweries across America. Prohibition in the 1920s squashed the industry; after the repeal of Prohibition, economies of scale eliminated smaller breweries. By the early 1980s only about 40 remained in existence.

But the American desire for more variety has led to the rebirth of the nearly defunct industry. To be sure, large, national beer companies dominated the overall ale market in 1980 and they still do today, with 43 large national and regional breweries sharing about 85% of the U.S. market for beer. But their emphasis on similarly tasting, light lagers (at least, until they felt threatened enough by the new craft brewers to come up with their own specialty brands) left many niches to be filled. One niche was filled by imports, accounting for about 12% of the U.S. market. That leaves 3 to 4% of the national market for the domestic specialty or "craft" brewers.

The new craft brewers, which include contract brewers, regional specialty brewers, microbreweries, and brewpubs, offer choice. As Neal Leathers at Big Sky Brewing Company in Missoula, Montana, put it, "We sort of convert people. If you haven’t had very many choices, and all of a sudden you get choices - especially if those choices involve a lot of flavor and quality - it’s hard to go back".

Aided by the recent legalization in most states of brewpubs, establishments where beers are manufactured and retailed on the same premises, the number of microbreweries grew substantially over the last 25 years. A recent telephone book in Colorado Springs, a city with a population of about a half million and the home of the authors of your textbook, listed nine microbreweries and brewpubs; more exist but prefer to be listed as restaurants.

To what extent does this industry conform to the model of monopolistic competition? Clearly, the microbreweries sell differentiated products, giving them some degree of price-setting power. A sample of four brewpubs in the downtown area of Colorado Springs revealed that the price of a house beer ranged from 13 to 22 cents per ounce.

Entry into the industry seems fairly easy, judging from the phenomenal growth of the industry. After more than a decade of explosive growth and then a period of leveling off, the number of craft breweries, as they are referred to by the Brewers Association, stood at 1,716 in 2010. The start-up cost ranges from $100,000 to $400,000, according to Kevin Head, the owner of the Rhino Bar, also in Missoula.

The monopolistically competitive model also predicts that while firms can earn positive economic profits in the short run, entry of new firms will shift the demand curve facing each firm to the left and economic profits will fall toward zero. Some firms will exit as competitors win customers away from them. In the combined microbrewery and brewpub subsectors of the craft beer industry in 2010, for example, there were 152 openings and 43 closings.