Introduction
Coca Cola and Pepsi are both giant multinationals American Companies. They are both
nonalcoholic beverages that contain formulated concentrates and syrups. Pepsi and coke
manufacture almost the same popular cola brand of beverage that has for many years propelled
the sales of both companies to astronological levels in terms of revenue sales. The two drinks
cannot be differentiated directly by looking at them in a glass.
Coca cola had a total equity amounting to 33.44 billion in the first quarter of the year 2013 while
Pepsi had 24.389 billion for the same period. The two companies have almost the same financial
strengths but Pepsi has diversified its beverage industry to include food and other branded snacks
which account for almost 50% of its revenue sales.
Oligopolistic Competition
Coca Cola and PepsiCo are two multinationals companies that present a non-collusive
oligopolistic competitive market structure. The two companies control the cola industry globally
and they have literally not cooperated to fix prices or influence the prices in any way.
The major tenets of oligopolistic markets are that the markets are dominated by a small number
of large companies. The products are normally homogeneous or differentiated and the sellers in
the market are few while barrier to entry may not exist the initial capital requirement may be
unaffordable to ordinary investors (Samuelson and Marks, 2003).
7c Case Study – Coke and Pepsi 2
The dominance of the two firms can be measured using the concentration ratio where the
percentage of total sales represented by the firms in an oligopolistic market control compared
with the other industry players. For example, Coca Cola is the best selling soft drink in most
parts of the world and where it has less sales Pepsi cola takes the lead. For example, in the
Middle East, Coca Cola controls 25% of the soft drink sales and Pepsi controls 75%. Middle East
is the only place on earth where Coca Cola has been relegated to number two globally.
The sizes of these companies can allow them to control the prizes of soft drinks only that the
drinks are refreshments and not a necessity. But the two companies have never shown any
interest whatsoever to control global soft drink prices.
The distinguishing feature in oligopoly markets is that the firms are mutually
interdependent. The decisions made by one company are most likely to have a reaction from the
other companies that are operating in the same market. For example, when Coca Cola decided to
decrease the cost of its 200ml cola in the Indian market from R.10 to R.8, Pepsi cola had to
initiate some moves to protect its market share before its entire customers shift to Coca cola
(Samridh, 2013).
Kinked Demand Curve
D
R.10 Pepsi can ignore price changes
R.8
Pepsi can decide to match the price changes
R.6
Q1 Q Q2
7c Case Study – Coke and Pepsi 3
Pepsi can decide to ignore the price increases and allow its sales to drop to Q1 from Q or
alternatively match the reduction by reducing its prices to R.6 and increase its sales to Q2 hence
start a price war with Coca Cola (Sullivan & Sheffrin, 2003).
Most firms in this category may resort to non-price competition and still remain
competitive as their marginal costs can remain unaffected in the short run. The costs allocated to
research and development together with advertisement make up the marginal cost of production
which are always aimed at differentiating the products from their rival brands in an effort to
reduce cross-price elasticity of demand. The reduction of prices by Coke in its Indian market is
directed towards its market expansion strategies in the long run.
Reduction of prices in an oligopolistic market leaves the consumer in a better position as a
variety of less expensive close substitutes would be more available.
The mutual interdependence that exists in oligopolistic market structures makes it
difficult to evaluate and analyze perfect competition, monopoly or monopolistic competition. In
oligopolistic markets, the decision of a price out-put of a firm makes consider the reactions of the
other companies in the industry or market. The major barriers in the oligopolistic markets are the
large financial requirements, legal barriers like registered trademarks, patent or licences and the
large benefits of economies of scale (Varian, 2006).
However, due to the large presence of some products in some markets, the two
companies have in some instances acted as monopolies. The two products are a perfect
substitute. They basically share almost the same taste, pricing and in some cases share the
market. However, Pepsi has largely dominated the American and the Asian Market whereas
Coca Cola dominates the rest of the world. Coca Cola has tried in many ways to outsell Pepsi in
terms of pricing and marketing strategies and in product design (Boyes, 2004). Pepsi has
7c Case Study – Coke and Pepsi 4
however, diversified its market to include food sales that have been heavily branded and
differentiated. It currently enjoys a larger market share in the US than Pepsi. The total revenues
registered by the two companies are almost similar but Pepsi has almost twice the number of
employees working for it than Coca Cola.
7c Case Study – Coke and Pepsi 5
References
Samridh (2013) Oligopolistic Competition between Pepsi and Coca Cola
Sullivan, A. & Sheffrin, S.M. (2003) Economics: Principles in action. Upper Saddle River, New
Jersey 07458: Pearson Prentice Hall. p.111.
Samuelson, W and Marks, S. (2003) Managerial Economics 4th ed. page 35. Wiley
Varian, H.R (2006) Intermediate Microeconomics, Seventh Edition, W.W Norton & Company:
London
Boyes, W. (2004). The New Managerial Economics, Houghton Mifflin.
