Craft beer is underpriced

Posted in Beer on April 9th, 2014 by Nathan – 17 Comments
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If quantity cannot increase fast enough, price must.I've written a lot about this topic in various other locations, but I figured it's time to talk about it here: much of craft beer is absurdly underpriced. I've touched on supply/demand before in this blog, but a quick refresher can't hurt. Basically, to the left is a supply and demand curve. It's basic. Where that dot labeled "equilibrium" is is the magical world where supply matches demand. In that world there's an equilibrium price and an equilibrium quantity. It's magical, of course, because it rarely exists with specific goods.

Craft beer is one of those goods where the equilibrium seems to be a fantasy, impossible to reach. Instead, we're at a point on the supply curve down and to the left of the equilibrium: quantity is low, price is low.

The symptoms of this are obvious in many craft beer scenes around the country: super quick sellouts, the recent Hunahpu's Day disaster, beer scalpers, etc. When demand outpaces supply, these types of things happen. These are simple market inefficiencies. And there's only two ways to fix these inefficiencies: increase supply or decrease demand.

Increasing supply is a somewhat nice idea, and in the market overall, this is already underway. More and more craft breweries are opening, expanding, increasing production. However, because beers are not perfect substitute goods, an increase in supply in the overall market does not translate to an increase in supply for particular beers. As a result, rare or limited releases continue to see the problems described above. In fact, this is precisely where the problem is most evident and these beers are the exact ones I would argue are underpriced.

Thus, demand must be decreased. And as the supply/demand curve image shows, if the quantity can't increase, the price must. And as it does, the consumer appetite will decrease, demand will drop as prices approach equilibrium. Note that there's nothing "fair" about this – it's a purely capitalist system, but it's also a system that, with the scarcity that exists, works.

Jester King's Aurelian Lure and Nocturn Chrysalis were priced at sixteen dollars per 500ml bottle. There were about 500 bottles of each. Every bottle sold out within three minutes. That's absurd. Jester King could have easily charged twice that and the sellout would still have occurred, albeit at a slightly slower rate. In fact, I would argue that Jester King could have charged ten times as much – an unheard of (some might say obscene) $160 per bottle, and still sold out in a reasonable amount of time. (Of course, they would have had to remove the "limit one per person" stipulation. And I wouldn't have gotten any.)

A six-pack of Saint Arnold Divine Reserve may run you as much as twenty dollars. Look on Craigslist a day or two after it's been sold out in Houston, and you'll see postings asking for fifty or one hundred dollars. No matter how often people flag the posts (myself included) as prohibited, those sellers will sell the beer they bought. If they wouldn't, then we wouldn't see the same thing after every somewhat limited release. The prices they request are closer to the market equilibrium, and the gray market rewards them for taking advantage of a massive market inefficiency.

Part of the problem, I believe, is that there seems to be some kind of "noble pricing" that breweries implement. Reputational risk is probably a concern, but honestly, a lot of breweries are owned by or started by people who find it abhorrent to charge more than what they think is fair. Freetail is a great example of this, and they have stated before that they purposely keep prices low, intentionally do not capitalize on the extreme demand for Ananke and other special releases, and do not plan to change this in the future. Honestly, I think that's noble, wonderful for my wallet and those wallets of my friends, and unsustainable.

The prices probably won't rise in the near future, unfortunately, because of this reason and other reasons. But I repeat that I believe this is unsustainable. The growth in craft beer demand looks to continue at ridiculous rates, while supply simply cannot keep up. The result will be increased gray market activity, more catastrophes at beer releases, more rapid sellouts and angry consumers, and ultimately chaos. It's not impossible to envision a future in which a brewer throws his hands up and sells out or quits, in retaliation to this chaos. And that benefits nobody.

The responsible but unpopular thing to do is to raise prices. Craft beer is massively underpriced and unless this changes, there may be a crisis ahead.