20, 21 e 22 de junho de 2013 ISSN 1984-9354 MEASURING INDUSTRY CONCENTRATION IN BRAZIL’S BEER SECTOR - 1997-2012 Élisson Telles Moreira (PPGE - PUCRS) André Ricardo Stramar (PPGA - PUCRS) Fernando Valentim Pardo Eisele (PPGA - PUCRS) Helio Roberto Mathias Damiani (PPGA - PUCRS) Resumo Objetiva-se neste trabalho analisar o grau de concentração do setor de cerveja do Brasil entre 1997 a 2012. Trabalha-se com medidas de concentração para análise da competitividade do setor. Os índices Herfindahl e Entropia de Theil indicam que essa indústria é altamente concentrada. A indústria cervejeira do Brasil caracteriza-se por um oligopólio altamente concentrado e a tática de competição principal é feita por meio de marketing e diferenciação de produtos. Por fim, isto tende a impactar negativamente na entrada de novos competidores que queiram crescer para além de suas fronteiras e segmento de mercado. Palavras-chaves: industrial organization, concentration indices, oligopoly, beer industry IX CONGRESSO NACIONAL DE EXCELÊNCIA EM GESTÃO 20, 21 e 22 de junho de 2013 Introduction The concern about the possibility of excessive market concentration in the beer industry in Brazil began from the constitution of the American Beverage Company – AmBev in 1999. The company was created from the merger of two former rivals, the brewers Brahma and Antarctica. At the time, the economic environment of the industry, in the country and world, was conducive to the creation of the company. After economic liberalization in Brazil, there was a need and incentive for the formation and strengthening of large national companies – “The Champions”. With the globalization movement, there was an increase in international competition in the beer market. Traditional companies such as Anheuser-Busch, USA, and Heineken, Netherlands, went shopping in the 1990s, as a measure to reduce the exposure to their home markets –, already saturated. Soon, mergers and acquisitions, for this industry, represent an attitude that seeks to: (1) increase the variety of products in its portfolio with the objective of the risk reduction in the face of consumer choice, (2) achieve economies of scale to become more competitive compared to the rivals, and (3) go in search of the most attractive markets that have high growth in demand for beer. In this sector, as in many others, companies that do not enter in order to continuously grow, certainly it will be acquired by rivals. It is observed that economic power, obtained by merger, via associations or mergers, may bring harm or benefits to economic agents. Regarding to the damage, it is emphasized fundamentally the unfair price increases and, consequently, loss of social welfare due to reduced competition. With respect to the benefits accrued, it’s examined the gains from economies of scale, increase productivity and value creation to the organization. Thus, with this dual analysis, it can be inferred about the viability or necessity of a larger enterprise. The practice of anticompetitive conduct and the exercise of market power are the basis of the analysis of antitrust regulation and policy. In Brazil, specifically, there is the Lei 8.884/94 described to regulate mergers, ex-ante and ex-post. As for the focus ex-ante, it analyzes the behavior of the participants of the competitive process. The punishments in this 2 IX CONGRESSO NACIONAL DE EXCELÊNCIA EM GESTÃO 20, 21 e 22 de junho de 2013 case are of order against the repressive acts that harm the competitive process. Ex-post side, there is a standard preventative against the formation of more concentrated market structures. Competition is a fundamental environment for the analysis of company strategy (Schneider et al., 2009). The debate about the impacts of industrial concentration and effects on the competitive sectors of the economy are studied by several articles. The main studies are divided into analyzes through econometrics (Seixas, 2002; Cysne et al., 2003; Turolla et al., 2006), concentration indices and Structure-Conduct-Performance (SCP) model (Oliveira et al., 2010; Coelho Jr. et al., 2010; Ferreira; Gomes, 2006; Rocha, 2010), Porter’s Five Forces model (Quintella; Costa, 2009; Torres; Souza, 2010, Ribeiro et al., 2010) and computer simulations (Guerriero, 2008). The main objective of this study is to investigate the concentration of beer industry in Brazil from 1997 to 2012. Specific objectives were proposed: a) conduct a brief description of the main characteristics of the sector, and b) analyze the degree of competition in the sector via concentration indices. The article is divided into four main sections. The first part presents the theoretical framework. The second part presents the methodology. In the third, demonstrate the results. Finally, the last section concludes. Theoretical framework Industrial Concentration in the economic literature The type of industry that is less competitive is the monopoly: there is only one firm in an industry. And the type of industry more competitive is the perfect competition: there are many producers, each representing a tiny slice of the market. Most Brazilian industries are between these two extremes, cement, banks and supermarkets industries are examples of uncompetitive sectors (Concha-Amin; Aguiar, 2005). There is a literature on various measures of concentration that serve to check the degree of market competition. Therefore, more concentrated mean less competitive. Thus, a monopoly is the market's most concentrated. 3 IX CONGRESSO NACIONAL DE EXCELÊNCIA EM GESTÃO 20, 21 e 22 de junho de 2013 One way to measure this is to look at the market share of the four largest firms, the CR(4) or the Herfindahl index (H). There are several other indices (Bikker; Haalf, 2002). The importance of these indices is in its ease to capture structural aspects of the industry. Industrial concentration, thus, is a concern for the whole society, since the degree of concentration in a market provides an indication of the ability of the market for goods and services to operate efficiently. So when there is a significant concentration, monopoly power is granted to firms in the market, and this power is often exercised with detrimental effects to consumers. Concentration measurements are very important to consider the problems of imperfect competition brought by oligopoly and monopoly, and by taking into account the application of antitrust policy to encourage competition. These measures thus provide an indication of the ability of the largest control prices and exclude competition. In the capitalist system, a robust competition is seen as a factor that leads to production efficiency, lower costs and lead to better products for consumers (Picard, 2009). The imperfect competition rather unbalances the economic system and brings all the benefits to the dominant firm, so governments usually intervene with antitrust and anti-cartel measures when the concentration reaches high levels. The following presents the methodology of the work. Methodology The present study this is an applied and exploratory research. Part is a study of the measurements of industrial concentration – quantitative side – and describing the characteristics of the beer industry in Brazil – a qualitative side. It is used concentration measures to capture the degree of competition in a given market. The higher the concentration, the lower the competition between the companies. Thus, the different indicators consider the market shares of the agents according to different criteria. 4 IX CONGRESSO NACIONAL DE EXCELÊNCIA EM GESTÃO 20, 21 e 22 de junho de 2013 First, the concentration ratio of order k is classified as a partial and positive index of concentration, i.e., it requires only information of the biggest companies in the industry and does not use behavioral parameters. In this study, we opted for CR(4), hence, it is intended to estimate the parameters for the four largest companies in Brazilian beer industry: AmBev, Brasil Kirin, Heineken Brasil and Petrópolis. In that statistical inference is considered k, the number of companies in the industry, S the total sales volume, and qi the share of sales of i- nth company, i = (1,2,3,4, ..., n), thus: (1) The market share (MSi) which measures the portion attributed to the company i is given by: (2) It’s observed that and . The higher the index value, the greater the market power exercised by the k largest companies (Resende; Boff, 2002). The mathematical formula of the concentration ratio of order 4 of the market is: (3) Since MSi is the total sales of the i-nth enterprise market. Now, the Herfindahl (H) is a summary measure much used to estimate market concentrations. It is calculated by adjusting the market share of each competing firm. The number originated of the H estimation may be from 0.20, a perfect competition, and 0.7, a monopoly (Guidelines, 1997). Mathematically, this ratio is expressed as follows: (4) This index is calculated as the sum of squares of the relative sizes of the companies that make up the industry. It is based on the total number and size distribution of firms in an 5 IX CONGRESSO NACIONAL DE EXCELÊNCIA EM GESTÃO 20, 21 e 22 de junho de 2013 industry. Thus, the higher the H, the higher the concentration, and thus lower the competition between producers (Resende & Boff, 2002; Smith Jr. & Castro, 2010). Finally, the entropy index Theil (T) is a measure indicated by Theil (1967). Emerges from the analysis of the possibility that an event X is p. If there is confirmation of the event, the degrees of surprise emerging vary in the opposite direction to p. Therefore, the content of the message f(p) is inversely proportional to p. It uses a logarithmic function to describe the process of decreasing: (5) T is interpreted as a measure of concentration. Be pi the participation i-nth company. Entropy tells us that the expected value of the information content of a message that tells us that given industry sells x amounts to a consumer, the sale was effected by the i-nth firm.