Taste renaissance, tax reform, and industrial organization of the beer industry

We develop a theoretical model of the beer industry consisting of two segments: monopolistically competitive heterogeneous craft breweries that compete based on variety and quality and oligopolistically competitive macrobreweries that compete based on economies of scale. We also present empirical evidence that, in contrast to the practice in most manufacturing industries, smaller craft breweries pay more for higher quality inputs and charge higher prices. The model is simulated to analyze three counterfactual scenarios: the taste renaissance by expanding consumers' (i) taste for variety and (ii) preference for unique quality beer and (iii) the 2017 tax reform. The taste renaissance scenarios have similar directional effects on the monopolistic segment, but the impacts of an increase in the love‐of‐variety are much stronger than those of an increase in quality. In all three scenarios, the craft segment expands and the macrosegment contracts, but industry‐level sales rise and the aggregate price index declines, benefiting consumers.