competitive oligopolies a case study about the marketing war of coke and pepsi

Why don''''t Coke and Pepsi compete in pricing?. Coke and Pepsi are both famous brands with high recognition all over the world whose copyrights and trademarks are legally protected.. Accor

FOREIGN TRADE UNIVERSITY

FACULTY OF INTERNATIONAL ECONOMICS

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MICROECONOMICS 2

ESSAY

COMPETITIVE OLIGOPOLIES: A CASE STUDY ABOUT THE MARKETING WAR OF COKE AND PEPSI

Hanoi, January 14, 2022

Table of Contents

I INTRODUCTION: 3

II MAIN POINTS: 3

1 Are Pepsi and Coke competitive oligopolies? 3

2 Why don't Coke and Pepsi compete in pricing? 4

3 The status of marketing war between Coke and Pepsi in reality 6

4 Prediction about the future war 10

III CONCLUSION: 13

IV REFERENCES: 14

I INTRODUCTION:

Oligopoly is a type of market where <only a few firms account for most or all of total production= Thinking of the examples of oligopolistic industries in real life, there are many names that appear However, the most famous oligopolies can always be found in the soft drink industry Coca-Cola is a <leading manufacturer, distributor, and marketer of so drink concentrates and syrups=, owning or licensing more than 500 brands across all categories of so drinks PepsiCo is <one of the largest food and beverage companies in the world=, having 18 brands in its portfolio The marketing war of Coke and Pepsi - two leaders of the soft drink market - is always a hot topic: <This is a blood feud between the two companies, the likes of which we have rarely seen in the history of business=, said David Greising, Coca-Cola s CEO.’

II MAIN POINTS:

1 Are Pepsi and Coke competitive oligopolies?

Oligopoly can be defined as a type of market where there are few sellers holding very large market shares There are some characteristics requiring Coke and Pepsi to be oligopolies

First, in the carbonated soft drink industry, Coke and Pepsi are the two giants existing

in the market The market is dominated by these with a total market share of 72%; Coke s ’ market share is 42% while Pepsi s 30% (J.B Maverick, 2020, Coca Cola and Pepsi Control ’ the Global Beverage Industry)

Second, the products of oligopoly can be the same or differentiated In this case, Coke and Pepsi are perfect substitutes because they have quite the same taste, very similar chemical composition, people maintain strong behavioral preferences for one over the other We initially measured these behavioral preferences objectively, by administering double-blind taste tests

We found that subjects split equally in their preferences for Coke and Pepsi in the absence of brand information

Third, Coke and Pepsi have created high barriers to entry within the business In oligopoly, the smaller the number of firms, the harder for brand new rivals to enter the market This can be because of the bulk market share is in hand by Coke and cola and that they are professional enough to serve and manage the industry Coke has dominated the market since

1886 and followed by Pepsi 13 years later They're currently well established, they can apply advanced technology to reduce back price of production, they can understand their customers‟ tastes or habits well Coke and Pepsi are both famous brands with high recognition all over the world whose copyrights and trademarks are legally protected

Fourth, there are many types of non-price competition These are important factors building up the fame of each company Both Coke and Pepsi are willing to spend a lot of money on advertising to draw customers attention ’

Fifth, in an oligopolistic industry, firms are mutually interdependent, where the profit gained is depending not only on the prices but on the other firms (McConnell et al., 2009) Coke and Pepsi have to take the reaction of others into account or be aware of the effect of rival’s behavior on their profit whenever they want to make a change According to the corporate news in Business Daily, Coke is going to lower its price to battle with Pepsi and defend its market share The price cut has resulted in a reaction for Pepsi Pepsi is currently offering a 350ml bottle at the same price with Coke 300ml (Otuki, 2013)

2 Why don't Coke and Pepsi compete in pricing?

Considering oligopoly models when firms do not collude, the Sweezy model can be a useful method: <Despite its limitations, the Sweezy model can serve as an effective pedagogical tool for explaining price stability in competitive, non-collusive oligopolies.= (The American Economist Vol 26, No 2 (Fall, 1982), p.25)

There are some assumptions Assume that firms compete in pricing Each firm has a belief that: on one hand, when their competitors raise products prices, the current firm will ’ keep their price unchanged; on the other hand, when competitors reduce their prices, current firm will also decrease their prices

Having the graph below:

At first, firm set their products price at the equilibrium point P* and has the quantity ’ Q* According to the assumptions, if a firm raises their price, rivals will keep their price unchanged, leading to the quantity demanded of this firm to decrease dramatically It can be seen that the demand curve in this area is flat and elastic Also from the assumptions, if the firm reduces their price, rivals will cut their price as well, making the quantity demanded of this firm to increase slightly Demand curve in this area is steep and inelastic Therefore, it can

be concluded that in the Sweezy model, the demand curve is kinked and marginal revenue (MR) curve is discontinuous

The discontinuous MR curve represents the ability to stabilize the price of the oligopolist The larger the discontinuous is, the higher the price-stabilizing ability is If the

MC curve goes through the discontinuity in the MR curve then the optimal price (P) quantity (Q) of the oligopolist are P* and Q* Only when MC fluctuates outside the discontinuity in the

MR curve does the oligopolist change its P and Q

In conclusion, the Sweezy model implies that the price rigidity in oligopoly will tend to avoid competing in pricing because this strategy will reduce the profit of the market Therefore, oligopolists will prefer non-price competition or compete by using advertising

Moving on to the real case of Coke and Pepsi, the picture is quite the same as the famous Sweezy model When it comes to competition, the presence of brands causes demand friction - the amount that must be paid to a customer in order for them to accept a change in product or supplier According to recent research, consumers of Coke would switch to the competitor’s cola on condition they were given 30 cents a can, which would be equivalent to selling Pepsi with a 30% discount on its current price (Chan, T., Cosguner, K and Seetharaman, S (2012), Structural econometric model of dynamic manufacturer pricing: a < case study of the cola market , Social Science Research Network) It can be seen that only 13 = cents can persuade consumers of Pepsi to switch brands <However one cannot generalize

on the basis of these figures The relevant research was based exclusively on purchasing behaviour in a supermarket of a large US city in the early 1990s It does nevertheless illustrate that Coke drinkers display greater loyalty to their preferred brand than their Pepsi fellows This

no doubt explains why Coke is on sale almost everywhere and always more expensive than Pepsi.= (https://www.cambridge.org/core/, February 2019, pp 57-63, Cambridge University Press)

So Coca-Cola and Pepsi do not compete on price, they are shifting into a new vicinity

or launching new packaging Competition is although very real: it simply takes different forms

3 The status of marketing war between Coke and Pepsi in reality

3.1 Marketing strategy of Coke:

Coke is one of the most successful brands whose products are available in every country To become one of the largest brands of soft drink, this company has to design a unique strategy based on the well-known marketing mix of the <4Ps= including: <Product=,

<Price=, <Promotion= and <Place=

In terms of <Product strategy=, the company’s strategy is to diversify the products, concentrate on changing the packages to stimulate curiosity The following products are offered by Coke globally such as: Sprite, Fanta, Diet Coke, Fuze Tea, Coca Cola Zero… The next is illustrated through a unique bottle concept The logos are made visible so as to draw customers’ attention, which helps people to distinguish between different types from different companies

About <Price strategy=, Coke follows the second degree price discrimination strategy in its marketing mix Products in different segments can be charged at different prices Moreover, with different packages, Coke will be also sold at different prices By this way, the company can increase the revenue because there is not much difference in the costs required to produce the products

<Promotion strategy= is believed to be one of the most important strategies of Coke Coke created consumption by their appealing advertisement This is a brand which is willing to pay a huge amount of money to draw customers‟ attention They mostly concentrate on aggressive marketing Coke is often associated with happiness, in fact the name means

<Delicious Happiness=, the company wants to bring people together and create happy moments

in their lives In addition, many of these events or programs on television have been sponsored

by Coke making it one of the most recognizable brands

<Place strategy= plays an important role in the success of Coke Coke has entered the market for more than a century and appeared in more than 200 years Their place strategy is highlighted by their in depth distribution network The company produces the beverage using its secret recipe The corporation itself controls the wholes and is to blame for shopper brand selling campaigns additionally as producing and commercialism concentrates, beverage bases, and syrups to bottling plants Their bottling partners then manufacture packages, merchandise, and distribute the finished branded beverages to their selling partners, who finally sell them

to consumers

3.2 Marketing strategy of Pepsi

The 4P marketing mix (product, location, promotion, and price) is a combination of strategies and tactics that PepsiCo uses to fulfill its marketing plan In this regard, PepsiCo employs a variety of strategies and tactics based on the diversity of its products and brands Differences between markets also lead to differences in approaches used in the marketing mix However, despite these differences, PepsiCo's marketing shares some common characteristics that define the company s overall approach to implementing its marketing plan ’

The first marketing mix element - Product Mix - defines the products the organization offers to its customers PepsiCo started out as a PepsiCola company and all products were originally branded as Pepsi PepsiCo's current product lines are: Beverages (Soft drinks, Energy drinks, Bottled water), Food (Cereals, Rice snacks, Snacks, Side dishes, Breakfast bar) and other every day nutrition (Pepsico, https://www.pepsico.com/brands/product-information)

Many of PepsiCo s existing brands and products have been added through acquisitions after ’ PepsiCo acquired FritoLay Other products include mugs and T-shirts made by other companies licensed by PepsiCo.This element of the marketing mix aligns with PepsiCo s overall strategy ’ and strong growth strategies, emphasizing international expansion

The second one is Place in PepsiCo s Marketing Mix PepsiCo uses a global network to ’ distribute its products to consumers Distribution and sales locations are considered in this element of the marketing mix: grocery stores and convenience stores Customers can access Pepsi products through their websites (Pepsico, https://www.pepsico.com/brands/product-locator) Based on this element of the marketing mix, PepsiCo s distribution points are ’ primarily offline stores

Third, PepsiCo promotes its products to attract targeted customers This element of the marketing mix includes the marketing communications strategies and tactics that the company uses to reach customers The following is the tactics for your Importance PepsiCo advertising complex: Advertising, Sales Promotion, Direct Marketing and Public Relations Advertising is PepsiCo s primary marketing communications tactic For example, the company ’

is well known for using celebrity support to promote its products on television, radio, print and online media Trademarks that they sponsor or donate to shops and other institutions From time to time, PepsiCo offers promotions such as bundles or discounts In addition, local corporate offices sometimes carry out direct marketing through agreements to supply products

to organizations at wholesale prices In addition, PepsiCo uses public relations through financial support and sponsorship, for example in sports This element of the marketing mix indicates that advertising is the primary determinant of PepsiCo s ability to communicate with ’ target customers and promote products

Last but not least, about Pricing and Pricing Strategy, PepsiCo s pricing varies ’ significantly because the company has a wide range of products, which means that it has a large number of product lines and brands in its marketing mix Key Pricing strategies can be listed as: Market-Driven Pricing Strategy, Combined Daily Value, Pricing Strategy Most PepsiCo products are priced based on a market-based pricing strategy Company prices and prevailing market conditions Hybrid Everyday Value, on the other hand, is PepsiCo s pricing ’ strategy for certain products, especially soft drinks The company's goal with this pricing strategy is to close the gap between regular prices and holiday discounts In this way, PepsiCo hopes that consumers will buy more soft drinks every day, not

just during the holidays

3.3 Who started the war?

The wars between Coke and Pepsi started to happen in the 1920s From that time, both companies always came up with new ideas so as to advertise their products After Pepsi had gone bankrupt twice, thanks to the appearance of Donald M Kendall, Pepsi could find the right way In 1963, at the age of 42, he became chief executive of PepsiCo until his retirement in

1986 During his management, sales grew nearly 40-fold through acquisitions When he became CEO, the company launched its <Pepsi Generation= campaign that illustrated Pepsi as

a hip for young people while Coke only for old- fashioned people Moreover, in 1975, that company continued to conduct <Pepsi Challenge= The Pepsi Challenge< = was a legendary marketing promotion in which regular people blind taste test one cup filled with Pepsi and another with Coca Cola Upon tasting the colas, drinkers are asked what they like Not surprisingly, each dope Challenge over 50% of tasters preferred Pepsi over Coke From its origination in 1975, the Challenge was vastly roaring in grabbing market share from Coke

3.4 Typical wars in reality

First, competition in subject matter to make and maintain complete loyalty, and consequently recruit stars too protruding with the duel theme, Olympic boxer Marlen Esparza punches for Coke, whereas amateur battler Henry Cejudo fights for Pepsi

Second, competition for management of upstream activities so as to contain prices and prices For an extended time, a freelance network was tasked with process concentrate, bottling – currently in the main canning – and distribution Due to a series of acquisitions, Coca-Cola and PepsiCo have bit by bit confiscated these companies Within the USA, this was a vast undertaking, exploiting independent bottling plants with not up to 15% market share (Slind,

M and Yoffie, D (2006), Cola wars continue: Coke and Pepsi in 2006< =, Harvard Business School Case 706–447)

Third, competition for the exclusive presence of their merchandise to capture additional customers, and to trigger and secure loyalty On grocery store shelves the monopoly s products ’ are stacked aspect by side, usually competitory with different brands, resembling Sam s Cola at ’ Walmart or Cola Classic at Carrefour In contrast, shoppers don't have any alternative at filling stations, cafeterias, snack bars or perhaps baker‟s shops During this type of outlet, the house is just too restricted to put in many cold cupboards stocked with bottles and cans There s keen ’

group action between Coca-Cola and PepsiCo to achieve exclusive agreements with such retailers, for it s some way of generating repeat sales a part of the client base of such ’ shops are regulars the possibilities are that once they go elsewhere they ll purchase the cola ’ that has, by force of habit, become their most well-liked choice Competition between the competitors is even stiffer to get exclusive contracts with leading chains and keep the soda fountain flowing McDonald s is Coca-Cola s most valuable customer The Atlanta-based ’ ’ brand additionally has an exclusive contract with Burger King If you favor Tex-Mex food, chicken instead of burgers, you ll be drinking dope at Taco Bell or KFC ’

4 Prediction about the future war

Source: pepsico.com