Question

In 2017 , two beer drinkers in California filed a lawsuit against Kona Brewing Company, which sells Kona beer. The beer drinkers claimed that Kona was marketed as if it were brewed in Hawaii, but the beer is actually brewed in Oregon, Washington, Tennessee, and New Hampshire. If the market for beer were perfectly competitive, would the location of breweries matter to consumers? Briefly explain.

Short answer

In a perfectly competitive market, the location of breweries would not matter to consumers as long as the quality, price, and availability of the beer remains unchanged. Consumers are concerned with these factors rather than the location of production.

Step-by-step solution

Understanding Perfect Competition

To start with, perfect competition is an ideal type of market structure where there are many buyers and sellers, the products are homogenous or identical, and all buyers and sellers have perfect information about the market.

Assess the Importance of Brewery Location

In the context of beer consumers, the location of the breweries would matter if it has an effect on the quality, price or availability of the beer. Given the details of this case, Kona beer might be marketed as if it's made in Hawaii, but in perfect competition, what matters is whether the beer still meets customers' expectations in terms of quality, price, and availability.

Evaluate the Scenario

In a perfectly competitive market, as consumers have perfect information and the products are homogenous, the location of breweries should not matter. What would matter is if the change in location leads to changes in the price, taste or quality of the beer. Assuming that the beer made in all these locations has the same price, taste, and quality, it should not affect the consumer's buying decision.

Key concepts

Market Structure

The market structure is a central concept in economics, particularly in understanding how different industries operate. It describes the organization and characteristics of a market. In the world of economics, market structure refers to how a market is organized in terms of competition. There are several types of market structures, each with distinct features. Some common ones include:

• Perfect Competition: Characterized by numerous small firms, identical products, and no barriers to entry or exit.
• Monopoly: A single firm dominates the market, offering a unique product with high entry barriers.
• Oligopoly: A few firms control the market, often selling similar or differentiated products.
• Monopolistic Competition: Many companies compete, but products are slightly differentiated.

Perfect competition is the idealized version where buyers and sellers have perfect information, and products are homogeneous. Understanding the market structure helps us analyze how companies in that market might behave.

Consumer Information

Consumer information plays a vital role in perfect competition. It dictates how market participants make purchasing decisions. Perfect competition implies that all consumers have complete information about the products in the market. This encompasses details like price, quality, availability, and origin. In practice, this means:

• Consumers fully understand the differences or similarities between products.
• Price comparisons are easy and straightforward.
• There are no misunderstandings or misinformation about where and how products are made.

If consumers know everything about what's available, they can make fully informed decisions based on their preferences. In the case of Kona Brewing Company, if beer drinkers have complete information, they would know exactly where the beer is brewed, regardless of the marketing.

Product Homogeneity

Product homogeneity is one of the definitive characteristics of a perfectly competitive market. It means that the products offered by different sellers are indistinguishable from one another. For example:

• Products look and function exactly the same.
• Quality variations between sellers are negligible.
• Consumers believe products from all sellers are substitutable.

In the context of the beer industry, this would imply that every brand of beer tastes the same to consumers and serves the same purpose. Therefore, if all beer brands are considered homogenous, branding or origin might not influence consumer preference as much as it does in markets that aren't perfectly competitive.

Beer Industry

The beer industry serves as an interesting study when considering market structures like perfect competition. In reality, the beer industry contains elements that deviate from perfect competition, such as differentiated products and brand loyalty. Here’s why:

• Brands: Companies like Kona Brewing build strong brand identities not just based on taste but associations like origin.
• Product Differences: Many beers offer unique flavors, ingredients, or styles that differentiate them.
• Marketing Strategies: Breweries often rely on marketing to highlight unique aspects, appealing to consumer emotions and perceptions.

While the ideal of perfect competition suggests no importance to brewery location or brand, in practice, these elements often significantly influence consumer decisions in the beer market. This divergence from theory showcases the complex dynamics of real-world markets.