Should Uk Beer Brewers Be An Integrated Firm?

1645 WordsMar 8, 20167 Pages
Before 1989, the UK beer industry was monopolised by beer brewers. Due to the exercising monopoly power over two stages of production, in 1989, the UK Monopolies and Mergers Commission published “its lengthy and longawaited report on Beer” (Waterson, 2010) which recommended measures that eventually led to brewers having to divest themselves of 14,000 public houses (Slade, 1998). This essay will explore why UK beer brewers preffered being an integrated firm rather than a specialised firm focusing solely on brewing by investigating transactional costs, the costs and benefits of integration and the realisation that pub owners faced low fixed costs such as rent but high variable costs such as alcohol from brewers. It will also analyse the impact that the divestment had on the beer industry by exploring the consequences and reasons for the MMC intervention making reference to the creation of ‘pubcos’. Taking this into account, this essay will conclude that A firm is “a ‘black box’ operated so as to meet the relevant marginal conditions… thereby maximising profits” (Jensen and Meckling, 1976). There are many production stages involved in the production of a good, therefore, different firms choose to either specialise in one area of production or own different stages of production. These types of firms are known as a specialised firms and integrated firms respectively. An example of a specialised firm is a brewery that is solely focused on the brewery stage of production. The UK
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