Economic Analysis Of An Oligopoly Market Structure

brisk-made YORK Feeling bad ab come out of the c abidet the thrift? Indulge a little, take away a tonic water. Marketers at Coca-Cola Co. and PepsiCo Inc. ar counting on that sentiment to appeal to consumers everywherewhelmed with a rub-a-dub of bad economic spic-and-spans. What people fate to do is pause and refresh, say Coca-Cola tribal gaffer merchandise officer Joe Tripodi. Pepsi, the worlds second-largest blue boozing maker, launched a new food commercializeing practiceing at the beginning of the year, composition none 1 black eye launched its campaign cardinal weeks later.Soda makers, who have externalizen their tallest-profile products lose ground to ability make whoopies and termsy bottled water in late(a) years, are turning away from the life-style merchandise that has dominated the soda wars. Now, they apply to do customers back to the old favorites with a simple lure theyre cheaper or at least(prenominal) a better value. Cokes campaign includes 16-ounce p prevailic bottles of Coke, Coke Zero, Diet Coke, poove and Fanta for 99 cents. The new size could hook on people looking for a bargain, in that a 20-ounce bottle costs $1. 25 to $1. 50.An ad campaign called Open mirth and tied to the Coke Side of animation ads launched on Ameri cigarette Idol last week. One spot features two students academic term across from individually different in a library and flirting by drawing competing images of Coke bottles and on their arms. A grass of people have left wing the category, Beverage Digest editor fast one Sicher tell last week. Also, a lot of little people have not entered the category, so these ads whitethorn help Coke some(prenominal) recruit new young consumers and re-recruit some lapsed ones. Coke plans to bleed three ads during Sundays broadcast of the extremely manger football championship on NBC.PepsiCo spokeswoman Nicole Bradley said PepsiCo would air five to six transactions of commercials for bottled drinks during the Super Bowl, making it the biggest advertiser for the game. The ads volition feature Pepsi, Gatorade, PepsiMax and SoBe Life Water. With the launch of its new logo, the guild as well as has addd its amount of drink ads on billboards and in other public places such as resistance stations, bus s transcend and on tops of taxis. In recent years, as U. S. soda gross revenue fell steadily including 2. 5 percent in the third tie last year at PepsiCo, epoch Coke doesnt break out soft drink performance the two dark to other bottled drinks for growth. PepsiCo re concentrate oned its drinks portfolio around bottled Lipton teas and Starbucks coffees, its Aquafina bottled water, Izze sparkling succus drinks and others.Coke made the biggest drinks acquisition in patience history in June 2007 when it bought Glaceaus VitaminWater for $4. 1 billion. though its products contain plenty of sugar, the brand had attracted health-conscious consumers with drink names such as Power-C, Defense, Endurance, legal transfer and Multi-V.But CEO Muhtar Kent said last supervene that soft drinks are the oxygen of our industry. The chief executives of both soda makers indicated they were focusing on soft drinks last fall as consumers felt the weight of a recession however it had not yet been officially declared. PepsiCos push is complementary with the trend of shoppers transaction down, the companys North Ameri back end beverages chief Massimo DAmore said Tuesday. He sort outd to say the company was openhearted to consumers pocketbooks. We result not communicate on impairment, he said in an interview. pry to consumers is much broader than set.Its not the primary focus of our marketing. DAmore told reporters gathered Tuesday to hear details of the companys Super Bowl plans that Pepsis drink portfolio is the exact ammunition it unavoidably to win in the genuine climate. Chief Executive Indra Nooyi has said the company which as well owns the Fri to-Lay, Tropicana, Gatorade and Quaker brands aims to slow the decline of U. S. soda gross revenue. Both companies are move with how to hold on to consumers that have bighearted wary of the high-fructose corn syrup that is employ in a wide bod of bottled drinks, from soft drinks to bottled teas and energy drinks.David Schardt, senior nutritionist at the non benefit Center for cognition in the Public Interest, said the companies in vogue(p) campaigns are not going to cleanse public health if sales of sugar-based sodas do rebound. We already drink excessively many of our calories he said. ECONOMIC depth psychology OF AN OLIGOPOLY MARKET STRUCTURE 1. INTRODUCTION 1a. phrase SUMMARY Not many corporations can boast of a 100 year rivalry. The beverages industry witnessed such acuate contest between Coca-Cola and PepsiCo.One can say that the disceptation between the corporations was and still isso intense that it could be uniformned 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 forever and a day taken the lead in developing new products, but Coke in short learned their lesson and started to do the same. The companies not simply compete in soft drinks, but also have branched out to other beverages including coffee, juice drinks and even water. As the companies lose their market character 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 set strategy with a figure of cheaper products. The situation is each company is coming up with new products and ideas in order to increase their market administer. The creativity and effectiveness of each companys marketing strategy go forth eventually determine the winner with respect to sales, profits, and customer loyalty. 1b . JUSTIFICATION OF THE TOPIC Pepsi and coke secure over 75. 3% of market (as shown in the figure 1).These two companies have hearty control over the direction of the market in terms of scathe, quality and taste. This clearly indicates that the industry has a duopolistic structure. It is not at large(p) to enter into the market as it needs a large investment and can expect the big players to crush into the competition. The straw man of barriers to entry protects the present players from competition from new stiffs. The companies compete on product specialization either through product itself or through heavy advertising to contract the rubberlike of hire 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 note and mutual interdependence apply. Figure 1 Source Beverage Marketing Corporation, unfermented York. Retrieved fr om www. beverageworld. com data and statistics on 4/10/2008 2. ECONOMIC ANALYSIS A firm under oligopoly faces a kinked hire wriggle (see figure 2). The set of the kink is the point of the established market worth.The kink of the enquire carouse suggests that a competitor would match asymmetrically to expenditure increases and expenditure settles by the firm. Suppose the impairment is established at $1. 99 for a six-pack of either Pepsi or Coke. Lets consider the demand deform for Pepsi. If Pepsi increases its price to $2. 49 per six-pack, it allow lose some of its market to Coke on the AB component of the demand curve. Pepsi will be able to sell euchre six-packs a day instead of the pilot light sales take of meter.Coke is likely to inhabit at $1.99 and enjoy the additional sale, as some people who were really get Pepsi will be switching to Coke. If Pepsi lowers its price to $1. 49 to gain an advantage over Coke and increase it sales to 1500 six-packs, it may no t succeed. The increase in sales by Pepsi to 1500 can only slip away if Coke did not react to Pepsis price cut. However, Coke is likely to match the price reduction by Pepsi to protect itself against blemish of market share. As the result of price cuts by both Pepsi and Coke, there will be an increase in sales by both at least partially 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. Therefore, 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. pecker 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 thei r price since it would cause loss of sales and market share to the rival. Also neither of them is particularly raise in lowering the price and starting line a price war since the issuance is loss of profit for both in favor of consumers. The profit maximization level of output can be inflexible 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 quantity at $1. 99 according to the demand curve.The mediocre 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 interest reflectivity 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 metamorphoses in the cos t conditions of oligopolies do not cause a change in their profit maximization quantity and price as long as they are in the vertical range of the MR curve.This implies 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 therefrom suggest that under an oligopoly market prices are rigid. Firms peculiarly avoid lowering their price from fear of igniting a price war. rather oligopolies resort to non-price competition such as advertising. Price wars can and occasionally do occur when one of the governing firms in the oligopoly market experiences a significant decrease in its production cost and get to increase its market share.Coke and Pepsi know that they are spending millions of dollars on advertising vindicatory to counter each others ads. Advertising game will declare oneself us with a modeling role model within which to show the choice that the managers of oligopolistic firms face. ( see figure 4) Although it would increase both firms paying backs if both play little Advertising, this cannot be easily achieved. According to the above payoff matrix, playing intensifier 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 erratic Nash equilibrium of this game. 3. CONCLUSION Sales of carbonate 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 explosive economy, with consumers eating at restaurants less and buy fewer grab-and-go beverages.In addition, consumers are increasingly choosing splash water over other beverages at restaurants and at home to help have money and the environment. Both companies have also relied on finding new markets, especially in foreign countries. Although the goal of both companies are exactly the same, the two companies hope on somewhat different marketing strategies. The companies must be willing to take their target markets. They have to always be creating and updating their marketing plans and products. Gaining market share occurs when a company stays one-step ahead of the competition by designed what the consumer wants.