Black Market for Beer, or Good Old-Fashioned Arbitrage?

Note: post has been updated below.

I would very much like the Beeronomist to comment on this Washington Post article, but in the meantime, I'll do it myself. You are well aware of the issue: reselling "buzz" beer on the internet at an extravagant mark-up. Some breweries, apparently, are apoplectic:

Last month, for example, San Diego’s Stone Brewing Co., whose rare Vertical Epic beers are sometimes listed on eBay for more than $1,000 per bottle, began selling the first beer in its new Quingenti Millilitre series via a lottery system, and Stone has announced that people who try to resell it will be banned from future drawings. “We have involuntarily been a part of the eBay aftermarket for many years,” says Greg Koch, Stone’s co-founder and chief executive. “This is the first time we’ve come out, laid it on the table and said very point-blank, ‘Please, do not resell.’”

Daniel Fromson, who wrote the article, diligently follows the breweries' pique and ventures into the weeds of law and interstate commerce. The conclusion is a kind of moralistic/legalistic scolding of customers who are, in his words, "exploiting" the breweries.

Hogwash. In economics, there's this concept called "arbitrage," which is exemplified precisely in the act of buying underpriced specialty beer from the brewery and reselling it for fantastic sums online. (Here's Patrick using an example from the Portland Timbers.) Usually, people exploit loopholes for arbitrage opportunities. NPR recently reported that people were using a government incentive of free delivery to sell unwanted silver dollars; people were buying them in massive quantities with credit cards to get frequent-flier miles and then just spending the dollars or taking them to banks.

But here's what I don't get: why don't breweries just charge more for their beer? No one's exploiting a loophole; they're buying beer at prices way below their market value and reselling them instantly at their market value. Prices always find a point of equilibrium between supply and demand, and if breweries are going to leave all that money sitting on the table, people are going to capitalize on the chance to snatch it up.

There's a secondary thing I don't get. The article mentions a bunch of the classic beer geek celestials, like Russian River, Lost Abbey, and Cantillon. These breweries attained their status principally by offering beer so good it could command these prices. There's a clear halo effect when you are regarded as producing ambrosia that's very good for business. The whole purpose in creating rare specialty beers--from a business perspective--is to create buzz and bring attention to your product. It creates fanatics who will go online and buy your beer at $400 a pop--which in turn gets you more attention as the Washington Post writes about your beer.

If breweries were honestly losing money on the resales, that would be one thing, but they're not. They sell a product at a price they believe is reasonable and they make a tidy profit doing it. At any point, they could charge more for their beer if they wanted to do it and remove the incentive for people to resell online. For very good business reasons, they choose not to. For one, they keep their customers happy and engaged. For two, they continue to be among the very few breweries in the world that can command those prices on a bottle of beer--a pretty great marketing trick.


Update: Patrick picked up the baton and expanded on this in a more professional manner. It's a fine and careful consideration, and you should read it all, but of course, I'll poach a choice cut for my own purposes.

The fact that these market have arisen suggests that there was a missing market problem: buyers and sellers who would like to transact but for whom there is no forum for such transactions. The most common reason for such transactions is some sort of regulatory constraint. Black markets in command and control economies like the former Soviet Union are a perfect example: shoes are on sale in Moscow, but there is little demand, so buyers buy them and sell them illegally in Siberia and so forth.

You'll have to follow the link to see where he takes it.