Been there! Very touristy but what a cool place. I forgot about the bread laws.
Actually, the theory I read was that it was more the presence of a significant proportion of women in the blue collar workforce during World War II that started this trend. By reducing the hops and body, they made their wartime beers appeal to their consumers at the time, and after the war, found out that it didn’t hurt sales to keep it as it was.
Fundamentally though, they’ve learned that lowering the hops/body either has a flat or positive effect on sales in the US, so there’s no downside- it’s cheaper for them, and doesn’t negatively impact sales.
Here’s a few articles on it (most homebrewing related):
http://www.morebeer.com/brewingtechniques/library/backissues/issue2.1/jankowski.html
http://www.morebeer.com/brewingtechniques/library/backissues/issue2.3/fix.html
But the key point is, under either theory is that
It’s all the wimmin-folks fault!!!
By sales, that’s certainly true. But I’m willing to exclude from “beer” anything that is improved by fake lime flavoring. 
“Lite” beer - made by dilution with filtered water of an already watered down imitation or ersatz product - the marketers must be wondering what they can get away with as encore.
Corona Light - all the skunkiness and 1/3 more water too!
Well, I just can’t figure why people wouldn’t just buy their “regular” beer and cut it with water. Why pay more for a diluted product? Consumers really are stupid.
Speaking of Rheinheitsgebot, I noticed the ingredients in a Warsteiner that I was drinking included “Brewers Water”. What is that?
Interestingly enough, fresh Corona isn’t particularly terrible. I’ve had fresh draft Corona from the local Puerto Vallarta Modelo brewery, and it was a far cry from the bottled stuff we get stateside.
I’m not saying it was good, but it wasn’t bad for that style of beer.
Hey, when you gotta go you gotta go. Brewers are no exception.
But that’s my point. People argue for deregulation by claiming it will free up producers to make better products. But in the real world, deregulation usually results in a race to the bottom.
Just a literal translation of the German “Brauwasser”, which is marketing speech for “The water we use for brewing”. (which allegedly is extremely soft and therefore, yadda, yadda)
In theory, at least, lite beers have done a lot more than just diluting it with water. Some of the flavoring components (like hops) are basically calorie-free and alcohol itself adds calories without adding much flavor.
In fact, one standard serving of alcohol is 100 calories even if you distill every other component out. Any beer advertising less than 100 calories in 12 oz has done it by cutting the alcohol.
The whole “watering it down” is kind of misleading; the big boys do something called “high gravity brewing”, where they basically brew their batches very, very strong in terms of alcohol, hops and body, and then dilute it to spec at packaging.
This isn’t quite an economy issue in the sense that you might be thinking- it still takes the same amount of barley to brew a 5% abv beer either way you do it. However, if you have a brewery capable of handling batches of X size, it makes more sense to brew stronger batches and dilute them, because then you can actually bottle a batch of X+Y size, where Y is the amount of water added to dilute to the desired level.
There are also, believe it or not, quality advantages to brewing and diluting like this. For example, it’s almost certainly more consistent to brew a high gravity batch, check the gravity, and then precisely dilute to the final gravity you want, instead of hoping that you get the exact final gravity after fermentation. In other words, it’s easier to add water precisely than to control all the variables for the fermentation and mash to hit that target exactly. And in that case, you don’t get the advantage of being able to brew more than your brewery’s nominal capacity either.
All that said, they can’t really take one brew, and dilute it with Y water to have “Michelob”, and then add a little more and have MichelobLight, and just a little more and have Michelob Ultra. The hops don’t scale like that.
Ultimately, what they’re probably doing is tweaking the mash recipe to minimize the amount of non-fermentables, so that the finished product is mostly alcohol and water (even by beer standards), with very little of the non-fermentable, but digestable stuff that adds body and flavor to most beers. That way, they can claim “low-carb”, and yet still give people something beer-esque, without reducing their ability to get a buzz.
Wait… do you believe that Bud Light is the result of deregulation of the beer market? It actually was introduced PRIOR to most deregulation (it came out in 1981, a lot of the beer deregulation which led to the explosion of craft brewing came in the early to mid 80s and didn’t really take fruit until the 1990s). Anheiser-Busch didn’t need deregulation to make Bud Light - it isn’t like homebrewing or gastropubs selling direct to consumers would have changed the introduction of a light beer by a macrobrew.
And FWIW, macrobrews may dominate the market, but without the deregulation of the market, you wouldn’t have had craft beer even hitting the 15-20% of the market they currently hold (and then a few of them getting gobbled by the big producers). Deregulation of the beer market in the US made beer far, far better and has been a fantastic success story.
Now go back and reread the OP. The situation in Germany is nothing like the situation in the United States.
American regulations prior to the eighties prohibited home brewing and “beer pubs”. Lifting those regulations did lead to an expansion of products.
But the German regulations essentially limit the products that can go into beer; they prohibit artificial ingredients. If those regulations were repealed, it wouldn’t lead to a craft beer explosion; it would lead to the use of preservatives and artificial flavors and colors in German beer.
Those regulations have been repealed… as of 1987 by the EU. Have you witnessed these issues?
A consumer watering down beer would reduce not only the alcohol concentration, but also the carbonation level – this plays a significant part in the flavor and “experience” of a beer.
Most consumers who want lower alcohol beers would not enjoy any beer they watered down themselves.
Furthermore, your Post #5 doesn’t limit it to Germany, you seem to be speaking of deregulation in general (“in practice when businesses are deregulated they usually”).
To be more exact, the EU rules applied to imported beers, and then further in 2015 where German beers can be produced outside of the four ingredients, but not called “beer” - which has a similar issue that say, GMO labeling, would. People may not buy something called something other than beer, even though it’s exactly the same style as something they’d buy imported.