Coca Cola Oligopoly Market Analysis

In the carbonated soft drinks industry there are two well-known giants in the market, Pepsi and Coca-Cola. With these firms selling CSD of similar tastes, their products became perfect substitutes of each other and since they are the only large firms in the industry we can conclude that this is an oligopoly market.
In an oligopolistic market the firms are mutually interdependent. This means that profit gained doesn’t only depend on prices but also on the actions of the other firm. Since Coke and Pepsi are perfect substitutes, the price elasticity of demand should be perfectly elastic. However the fact that their strategic actions are dependent on each other this results in a fairly elastic demand. When either firm increases prices their customers …show more content…
This falls back to the firms being mutually interdependent. For example if Coke decides to lower prices, it will grab customers from Pepsi and Pepsi will lose profits. Thus when Coke reduces prices Pepsi must also reduce its prices to avoid losing customers. This becomes a chess game between the two firms where one firm will act while thinking about how the other firm will react. The strategic decisions these firms make result from using a game theoretic approach where one firm will seek its best options while considering the possible actions the opposition will make. Since these two giants basically control the whole CSD market instead of having price cuts that will reduce their profits they seek competitive advantages elsewhere. Both firms will invest a lot of money in advertising to differentiate their product and gain higher sales. This can be seen by the introduction of diet options, different flavors, dispensing machines and so on. Also Coke took the route of advertising and expanding outside of the US while Pepsi decided to practically put all their chips in the US market. Since Coke and Pepsi are the two firms that control the industry they can cover the extra costs to advertise by just increasing their prices. They have all the power to maximize profits at a higher price since in this oligopoly the price will always be higher than in perfect competition. Since price then will be higher than marginal cost, output will have to be restricted by both companies to make greater profits. Similar to a monopoly this makes them the price-makers in the industry which will in turn assure a profit in the long run for both firms. In the long run these two firms don’t need to worry about competition because they have created high barriers of entry. Combined they can serve the entire industry, they have brand loyalty, they are technologically advanced which reduces