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Submitted by:
Rohit Gupta(EPGP-09-151)
Sachin Mittal(EPGP-09-154)
Reuben Rajan(EPGP-09-150)
Raghavi Dhamodharan(EPGP-09-139)
Acknowledgement
We the students of EPGP 09 batch would like to extend our
sincere thanks to the institute IIMK and Professor Shubhasis
Dey for providing us the opportunity to study and understand
the oligopoly and various strategies being used by them.
Abstract
This project illustrates that in duopoly market, price war may
not be the dominant strategy to gain market share; the way two
cola giants, Coke and Pepsi, had moved from price war to
advertisement war as analyzed via Nash Equilibrium and Game
Theory.
Introduction
Industry overview
The non-alcoholic beverage industry broadly includes soft
drinks and hot drinks. Soft drinks contain carbonated or non-
carbonated water, a sweetener, and a flavor, and hot drinks
include coffee and tea. The soft drink category dominates the
industry and includes carbonates, juice, bottled water, ready-to-
drink tea and coffee, and sports and energy drinks. Soft drinks
are sometimes referred to as liquid refreshment beverages (or
LRBs). In the US, LRBs lead food and beverage retail sales
Major companies
The non-alcoholic beverage market is a highly competitive
industry that includes two behemoths The Coca-Cola
Company (KO) and PepsiCo, Inc. (PEP). Collectively, these
companies hold about 70% of the US CSD market. Dr Pepper
Snapple Group, Inc. (DPS), Monster Beverage Corporation
(MNST), and Cott Corporation (COT) are some other key
players in the CSD market.
Ingredient facts
The Coca-Cola Company (KO) and PepsiCo, Inc. (PEP) are the
leading soft drink manufacturers. A 12-fluid ounce can of Coca-
Cola contains 39 grams of sugar and around 34 milligrams of
caffeine. A 12-fluid ounce can of Pepsi contains 41 grams of
sugar and 38 milligrams of caffeine. A 12-fluid ounce can of Dr
Pepper, made by Dr Pepper Snapple Group (DPS), contains 40
grams of sugar and 41 milligrams of caffeine. Energy drinks
made by leading companies such as Monster Beverage
Corporation (MNST) contain higher amounts of caffeine.
Profits = Revenue-Cost
Discussion on Profits
1) If Coke charges $1 for bottles of coke and Pepsi
charges $2 for bottle of Pepsi then Coke takes all profit
which is $1.50 per bottle:
From the previous example we could see that the firm which
charges the lower price will obtain all profit, and other firm
which charges higher prices per bottle of drink will get No Profit.
Now we have seen what the profits of each firm are, but in
order to find Nash equilibrium, first we need to find firms best
response function given what other company does.
Same is true,
Bottom line from above is that this long term price war between
Coke and Pepsi would probably may not be healthy for duopoly
market as if both the players reduce selling price they may end
up in less revenue and if one of the player decreases price,
other will follow the suit to keep the market share.
Coke charges Coke makes normal profit Coke makes small profit
low price Pepsi takes a loss Pepsi makes small profit
Above pay-off matrix proves that both the firms must charge
high price and is the dominant strategy.
Further Analysis
The-coke--pepsi-rivalry-in-indian-markets- by
MilanaBorisev
http://www.investopedia.com/articles/markets/081315/look
-cocacolas-advertising-expenses.asp
http://marketrealist.com/2014/11/understanding-
consumer-craving-soft-drinks/
https://www.chartist.co/charts/55956
https://www.statista.com/statistics/286547/pepsico-
advertising-spending-worldwide/
https://www.statista.com/statistics/286526/coca-cola-
advertising-spending-worldwide/
Pearson Series in Economics- Robert Pindyck, Daniel
Rubinfeld-Microeconomics-Prentice Hall (2012)
http://www.economicsdiscussion.net/oligopoly/bertrands-
duopoly-model-with-diagram/5396
ICFAI Center for Management Research , 2001: Pepsi vs.
Coke
Images courtesy Google.