Presented By: Health, History, Demography and Development (H2D2)
Health, History, Demography and Development (H2D2)
Product Switching, Adaptation and Firm Survival in the Brewing Industry during Prohibition presented by Carlos Hernandez, University of California, Los Angeles
Abstract:
This paper studies the process by which firms adapt to repeated reductions in demand. I focus on the American brewing industry during the early twentieth century. Many states and counties chose to prohibit the sale and production of alcohol in the years leading up to the 1919 federal prohibition. Because of high transportation costs, local prohibition in nearby markets reduced the demand for beer production for some breweries more than others. Using novel micro-data at the brewery level, I show that breweries adapted to this first shock by acquiring machinery such as carbonators to produce alternative products like soft drinks. This initial investment strategy allowed them to endure federal prohibition (1919-1933), when no brewery was allowed to produce or sell beer. Breweries that faced the average reduction in demand due to local prohibitions were 12 percent more likely to survive the entire prohibition period (local + federal) than breweries not affected by local prohibitions. Higher survival rates are consistent with a model in which firms adapt to reductions in demand by making irreversible investments in other products, thereby endogenously increasing their ability to respond to future shocks, rather than with models in which firm survival depends exclusively on exogenous productivity.
This paper studies the process by which firms adapt to repeated reductions in demand. I focus on the American brewing industry during the early twentieth century. Many states and counties chose to prohibit the sale and production of alcohol in the years leading up to the 1919 federal prohibition. Because of high transportation costs, local prohibition in nearby markets reduced the demand for beer production for some breweries more than others. Using novel micro-data at the brewery level, I show that breweries adapted to this first shock by acquiring machinery such as carbonators to produce alternative products like soft drinks. This initial investment strategy allowed them to endure federal prohibition (1919-1933), when no brewery was allowed to produce or sell beer. Breweries that faced the average reduction in demand due to local prohibitions were 12 percent more likely to survive the entire prohibition period (local + federal) than breweries not affected by local prohibitions. Higher survival rates are consistent with a model in which firms adapt to reductions in demand by making irreversible investments in other products, thereby endogenously increasing their ability to respond to future shocks, rather than with models in which firm survival depends exclusively on exogenous productivity.
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