Pabst Brewing Company began operations in Milwaukee, Wisconsin in 1844 and was the largest brewer in the United States for a significant amount of the late nineteenth century. Walzer (2016a) notes that Pabst Brewing Company steadily expanded and industrialized their operations through the late nineteenth century and into the twentieth century. For example, Pabst continued its expansion into the 1940s, purchasing the Hoffman Beverage Company of Newark, New Jersey and the Los Angeles Brewing Company (Walzer, 2016a). Most notably, Pabst Brewing Company improved its position substantially by purchasing and merging with Blatz Brewing Company in 1958. Blatz Brewing Company began operations in Milwaukee, Wisconsin in 1851 (Walzer, 2016b). While Blatz Brewing Company was considered to be an innovator in the nineteenth century, by 1950 the company was not able to effectively compete with the national industry expansion, consolidation, and modernization (Walzer, 2016b). This faltering ultimately lead to the acquisition by Pabst Brewing Company (Walzer, 2016b). Elzinga and Swisher (2005) note that the merger of Pabst Brewing Company and Blatz Brewing Company was a strategic decision driven by Pabst Brewing Company to help them compete with the two largest brewers in the United States at that time, Anheuser-Busch and Schlitz. In 1958, Pabst Brewing Company was the United States’ tenth largest brewer, and Blatz Brewing Company was the United States’ eighteenth largest brewer (Elzinga & Swisher, 2005). Following the merger, the combined enterprise would be the fifth largest brewer in the United States (Elzinga & Swisher, 2005)
The Antitrust division of the US Department of Justice challenged the merger of Pabst Brewing Company and Blatz Brewing Company in 1959 (Elzinga & Swisher, 2005). Elzinga and Swisher (2005) note that the challenge of this merger took place during a period of particularly aggressive anti-merger enforcement dictated by the US Congress (Elzinga & Swisher, 2005). The challenge of this merger was first heard in a Wisconsin trial court. The initial judgement went against the US Department of Justice and in favour of the merger (Elzinga & Swisher, 2005). In short, the court’s decision stated that the US Department of Justice had failed to correctly identify the relevant market for the merger entity and thus could not effectively demonstrate any anti-competitive impacts of the merger (Elzinga & Swisher, 2005). However, the US Supreme Court reversed the decision of the Wisconsin trial court in 1966, disallowing the merger of Pabst Brewing Company and Blatz Brewing Company (Elzinga & Swisher, 2005). Moreover, Elzinga & Swisher (2005) state that during this period of zealous anti-merger sentiment the US Supreme Court often declined to entertain elaborate economic reasoning, viewing virtually all concentration as harmfully anticompetitive. Based on this ruling, Pabst Brewing Company was ordered to divest itself of the Blatz brewing business (Walzer, 2016a).
Market Definition and Market Power:
In the Wisconsin trial court, where the merger between Pabst Brewing Company and Blatz Brewing Company was first challenged, the US Department of Justice argued that there were two potential relevant markets in which to assess the competitive effects of the merger: Wisconsin, or a three-state group of Wisconsin, Illinois, and Michigan (Elzinga & Swisher, 2005). The Wisconsin trial court disagreed and ruled that the US Department of Justice had not provided sufficient evidence to justify either of the proposed relevant markets (Elzinga & Swisher, 2005). Instead, the trial court stated that the only logical remaining relevant market for this analysis was the entire continental United States. It was based on this market definition that the Wisconsin trial court allowed the merger (Elzinga & Swisher, 2005 ). Furthermore, the continental United States was used as the relevant market in the Supreme Court’s final ruling (Elzinga & Swisher, 2005). The product-specific relevant market for this case was not noted in the literature; however, it is likely safe to consider the product-specific relevant market to be all beer available in the United States at the time of the challenge.
It is noted that prior to the merger Pabst Brewing Company and Blatz Brewing Company were the tenth and eighteenth largest brewers in the United States, respectively (Elzinga & Swisher, 2005). After the merger, the combination of both brewers continuing under the name Pabst Brewing Company, was the fifth largest brewer in the United Sates; however, the fifth largest brewer only represented 4.49% of the total industry sales (United States v. Pabst Brewing Co., 384 U.S. 546 (1966). Furthermore, Elzinga and Swisher (2005) note that the Herfindahl-Hirschman Index for the U.S. beer industry was 140 only several years prior to the merger. Therefore, we can conclude that the beer market in the United States was not heavily concentrated and even the fifth largest brewer had little market power. However, in the Wisconsin trial court, the US Department of Justice argued that the relevant market could be Wisconsin, or a three-state group of Wisconsin, Illinois, and Michigan (Elzinga & Swisher, 2005). While both of these were not considered the final relevant market, the share of the merged entity in Wisconsin in 1957 was 23.95%, and in the three-state area was 11.32% (United States v. Pabst Brewing Co., 384 U.S. 546, 1966). Therefore, based on the market share we can conclude that the merged entity had relatively low market power in submarkets.
Main Arguments and Decision:
In this case the defendant was Pabst Brewing Company and the plaintiff was the Antitrust Division of the US Department of Justice. The Antitrust division of the US Department of Justice challenge of the merger between Pabst Brewing Company and Blatz Brewing Company was initially dismissed following the trial court’s decision that the government had failed to prove that the state of Wisconsin or the combination of Wisconsin, Illinois, and Michigan constituted relevant markets within which to evaluate the competitive effects of the merger (Elzinga & Swisher, 2005). In response, the Wisconsin trial court suggested that the relevant market for analyzing potentially anti-competitive effects of the merger was the entire continental United States (United States v. Pabst Brewing Co., 384 U.S. 546 (1966), n.d.). However, as the US Department of Justice could not justify Wisconsin or the combination of Wisconsin, Illinois, and Michigan as the relevant market, it also failed to demonstrate that the merger might substantially lessen competition in the continental United States (Elzinga & Swisher, 2005).
The merger case ‘Brown Shoe v. US’ provided the underpinnings for horizontal merger judgements for many years in the US (Elzinga & Swisher, 2005) . Brown Shoe v. US is particularly notable because it introduced the ‘incipiency doctrine’ which states that a horizontal merger may be deemed anti-competitive even if the share of the market absorbed is relatively small because the merger itself is an indicator of a movement toward market concentration (Hylton, 2011). This case is particularly important for the US v. Pabst Brewing Co. case as Elzinga and Swisher (2005) note that there was an attitude of concern in the United States regarding an increase in concentration in the brewing business (Elzinga & Swisher, 2005). In particular, the US Congress saw the process of concentration of American businesses as extremely problematic and desired to dampen this before it gained momentum (Elzinga & Swisher, 2005)
In 1966 the Supreme Court gave its final ruling on the U.S. v. Pabst Brewing Co. case (Elzinga & Swisher, 2005). Elzinga & Swisher (2005) state that the US Supreme Court’s final decision reversed the Wisconsin trial court’s decision that had permitted the merger. The US Supreme Court ruled that the merger of the two brewer’s would violate chapter 7 of the Clayton Act (Elzinga & Swisher, 2005). The Clayton Act’s purpose is “to prevent or eliminate unlawful tying contracts, corporate mergers and acquisitions, and interlocking directorates” (Federal Trade Commission | The Antitrust Laws, 2017). Specifically, chapter 7 prohibits mergers and acquisitions where the effect "may be substantially to lessen competition, or to tend to create a monopoly." (Federal Trade Commission | The Antitrust Laws, 2017). Elzinga and Swisher (2005) note that the US Supreme Court ruled that the US Department of Justice had indeed completed enough analysis to state that the merger would violate chapter 7 of the Clayton Act in accordance with the ‘incipiency doctrine’ discussed above, the US Supreme Court stated that as the merger was taking place in an industry trending towards concentration (Elzinga & Swisher, 2005). Thus, the merger of Pabst Brewing Company and Blatz Brewing Company was disallowed.