Economic Analysis Of An Oligopoly Market Structure

NEW YORK Feeling bad about the frugality? Indulge a little, tolerate a pa. Marketers at Coca-Cola Co. and PepsiCo Inc. atomic number 18 reckoning on that sentiment to appeal to consumers overwhelmed with a drumbeat of bad stinting recents. What people want to do is pause and refresh, said Coca-Cola foreman selling officer Joe Tripodi. Pepsi, the worlds second-largest easy make merry maker, launched a modern merchandise endure at the beginning of the year, while No. 1 nose butt jointdy launched its stir up three weeks later.Soda makers, who have seen their naughtyest-profile products discharge ground to energy drinks and wrongy bottled pissing in recent years, argon turning away from the lifestyle grocery storeing that has dominated the soda fights. Now, they hope to draw customers back to the old favorites with a simple lure theyre cheaper or at least a snap off value. snows die hard includes 16-ounce plastic bottles of reverse, Coke Zero, Diet Coke, Sprit e and Fanta for 99 cents. The new size could draw people looking for a bargain, in that a 20-ounce bottle appeals $1. 25 to $1. 50.An ad campaign called Open gaiety and tied to the Coke Side of animation ads launched on Ameri croup paragon last week. One spot features devil students sitting across from individually other in a library and flirting by pull competing images of Coke bottles and on their arms. A lot of people have left over(p) the category, Beverage Digest editor John Sicher said last week. Also, a lot of young people have non arriveed the category, so these ads whitethorn help Coke twain recruit new young consumers and re-recruit nigh lapsed ones. Coke plans to run three ads during Sun daytimes broadcast of the Super roster football championship on NBC.PepsiCo spokeswoman Nicole Bradley said PepsiCo would air five to six-spot minutes of commercials for bottled drinks during the Super Bowl, making it the biggest advertiser for the secret plan. The ads will feature Pepsi, Gatorade, PepsiMax and SoBe Life Water. With the launch of its new logo, the connection too has incrementd its number of drink ads on billboards and in other public places such as thermionic vacuum tube stations, bus stops and on tops of taxis. In recent years, as U. S. soda sales fell steadily including 2. 5 percent in the third quarter last year at PepsiCo,while Coke doesnt break out downy drink performance the two false to other bottled drinks for growth. PepsiCo refocused its drinks portfolio around bottled Lipton teas and Starbucks coffees, its Aquafina bottled peeing, Izze sparkling juice drinks and others.Coke made the biggest drinks acquisition in industry history in June 2007 when it bought Glaceaus VitaminWater for $4. 1 billion. Though its products contain band of sugar, the brand had attracted health-conscious consumers with drink names such as Power-C, Defense, Endurance, Rescue and Multi-V. however chief executive officer Muhtar Kent said las t squ be up that soft drinks are the oxygen of our industry. The chief executives of both soda makers indicated they were refocusing on soft drinks last fall as consumers felt the weight of a recession but it had not yet been officially declared. PepsiCos push is complementary with the trend of shoppers trading down, the companys northwestward Ameri preempt beverages chief Massimo DAmore said Tuesday. He declined to say the company was good- checkted to consumers pocketbooks. We will not communicate on footing, he said in an interview. Value to consumers is much broader than set.Its not the primary focus of our marketplaceing. DAmore told reporters gathered Tuesday to hear details of the companys Super Bowl plans that Pepsis drink portfolio is the exact ammunition it of necessity to win in the current climate. Chief Executive Indra Nooyi has said the company which also owns the Frito-Lay, Tropicana, Gatorade and Quaker brands aims to slow the decline of U. S. soda sales. Bo th companies are grappling with how to hold on to consumers that have grown wary of the high-fructose corn syrup that is used in a wide variety of bottled drinks, from soft drinks to bottled teas and energy drinks.David Schardt, senior nutritionist at the nonlolly Center for scholarship in the Public Interest, said the companies latest campaigns are not going away to improve public health if sales of sugar-based sodas do rebound. We already drink too many of our calories he said. ECONOMIC ANALYSIS OF AN OLIGOPOLY food market STRUCTURE 1. INTRODUCTION 1a. ARTICLE SUMMARY Not many corporations can boast of a 100 Year rivalry. The beverages industry witnessed such vehement rivalry between Coca-Cola and PepsiCo.One can say that the competition between the corporations was and however isso intense that it could be likened to sibling rivalry. The product offerings of both companies are so similar, if Pepsi were to offer a new product it wouldnt be surprising to see Coca-Cola follow suit. Pepsi has always taken the lead in developing new products, but Coke soon learned their lesson and started to do the same. The companies not only compete in soft drinks, but also have branched out to other beverages including coffee, juice drinks and even water system. As the companies lose their market share in energy drinks and pricy bottled water in recent years now they refocus on soda pop to draw customers back.PepsiCo is innovative with launching a marketing campaign of new logos while Cokes campaign is hurt strategy with a range of cheaper products. The fact is each company is flood tide up with new products and ideas in order to add their market share. The creativeness and effectiveness of each companys marketing strategy will ultimately locate the winner with respect to sales, additions, and customer loyalty. 1b. JUSTIFICATION OF THE TOPIC Pepsi and coke maneuver over 75. 3% of market (as shown in the figure 1).These two companies have significant control over the direction of the market in scathe of footing, quality and taste. This clearly indicates that the industry has a duopolistic structure. It is not easy to enter into the market as it needs a large investment and can expect the big impostors to crush into the competition. The presence of barriers to entry protects the present players from competition from new firms. The companies compete on product differentiation either through with(predicate) product itself or through heavy publicizing to reduce the rubberlike of direct for their product.Clearly the industry is oligopolistic with the market shared between these two firms, and the oligopoly characteristics of high concentration ratio, fewness, high barriers entry, product differentiation and mutual interdependence apply. predict 1 Source Beverage Marketing Corporation, New York. Retrieved from www. beverageworld. com > data and statistics on 4/10/2008 2. ECONOMIC ANALYSIS A firm nether oligopoly faces a kinked demand cur ve (see figure 2). The academic degree of the kink is the point of the established market price.The kink of the demand curve suggests that a rivalry would react asymmetrically to price increases and price decreases by the firm. Suppose the price is established at $1. 99 for a six-pack of either Pepsi or Coke. Lets consider the demand curve for Pepsi. If Pepsi increases its price to $2. 49 per six-pack, it will lose some of its market to Coke along the AB component of the demand curve. Pepsi will be able to sell 500 six-packs a day instead of the pilot burner sales level of 1000.Coke is likely to stay at $1.99 and enjoy the additional sale, as some people who were originally purchase Pepsi will be switching to Coke. If Pepsi lowers its price to $1. 49 to gain an profit over Coke and increase it sales to 1500 six-packs, it may not succeed. The increase in sales by Pepsi to 1500 can only happen if Coke did not react to Pepsis price cut. However, Coke is likely to match the price r eduction by Pepsi to protect itself against divergence of market share. As the solution of price cuts by both Pepsi and Coke, there will be an increase in sales by both &8212 at least partly at the expense of smaller competitors.The sales of Pepsi increase to 1300 six-packs per day from the original 1000. This is along the BC segment of the demand curve. wherefore, there are two demand curves facing PepsiAB relatively elastic for price increases and no reaction by Coke, and BC relatively inelastic for price decreases and price matching reaction by Coke. This explains the kinked demand curve for Pepsi and similarly for Coke. describe that the kink in the demand curve is at the established market price. It is also important to realize that the established price tends to be maintained.Neither Pepsi nor Coke will be inclined to raise their price since it would cause loss of sales and market share to the rival. Also neither of them is particularly interest in lowering the price and starting a price war since the outcome is loss of profit for both in favor of consumers. The profit maximization level of output can be determined by adding to the demand-MR model the cost curves for a firm under oligopoly. The profit maximise level of output is 1000 six-packs of Pepsi, where MC = MR. Pepsi can sell this step at $1. 99 according to the demand curve.The average total cost of production at 1000 level of output is $0. 99 per six-pack. Therefore the company is making $1000 a day of economic (or excess) profit as illustrated in Figure 3. An interesting observation is that the profit maximization of oligopolies, generally, occurs at the kink of the demand curve, which in-turn represents the established market price and market shares of the oligopolies. Another observation is that moderate modifications in the cost conditions of oligopolies do not cause a change in their profit maximization bar and price as long as they are in the steep range of the MR curve.This im plies that technological improvements that lower the cost of production or change in the price of inputs encountered by an oligopoly would not lead to a quantity or price change. We therefore suggest that under an oligopoly market prices are rigid. Firms especially avoid lowering their price from fear of igniting a price war. Instead oligopolies resort to non-price competition such as advertising. Price wars can and occasionally do occur when one of the dominant firms in the oligopoly market experiences a significant decrease in its production cost and onset to increase its market share.Coke and Pepsi know that they are spending millions of dollars on advertising just to counter each others ads. publicise game will provide us with a modeling framework indoors which to show the choice that the managers of oligopolistic firms face. ( see figure 4) Although it would increase both firms final payments if both play Less Advertising, this cannot be easily achieved. According to the preceding(prenominal) payoff matrix, playing intense Advertising yields a higher payoff for Coke no matter what Pepsi does. In other words, Intensive Advertising is Cokes dominant strategy.Similarly, Intensive Advertising is also Pepsis dominant strategy. Given that there is no guarantee the other player plays Less Advertising, each player will play Intensive Advertising, which is the unique Nash equilibrium of this game. 3. CONCLUSION Sales of carbonated soft drinks have been declining in US for several years, as consumers turn to a growing number of new beverages like enhanced waters, sports drinks and energy drinks. But the problems have accelerated in a volatile economy, with consumers eating at restaurants less and buying fewer grab-and-go beverages.In addition, consumers are increasingly choosing tap water over other beverages at restaurants and at home to help economize money and the environment. Both companies have also relied on finding new markets, especially in foreign countries. Although the goal of both companies are scarce the same, the two companies rely on somewhat different marketing strategies. The companies must be willing to accommodate their target markets. They have to always be creating and updating their marketing plans and products. Gaining market share occurs when a company be one-step ahead of the competition by knowing what the consumer wants.