Oligopoly-Coca cola & Pepsi

Oligopoly is defined as an industry in which there are a few firms. By a few it is meant that the number of firms should be sufficiently small for there to be conscious interdependence, with each firm aware that its future prospects depend not only on its own policies, but also those of its rivals. Firms in oligopoly can use either high-price strategy or low-price strategy to maximize their profit.  An industry is defined as a group of firms where the firms products are close substitutes for one another, that is have a high and positive cross elasticity of demand.

Coca cola and Pepsi are in an oligopoly market. They are selling the homogeneous product so they can control over price but they will consider their action when they would like to change the price of their goods. They usually change the price of their goods according to kinked demand curve. They are using cut-throat competition to attract more potential customer.

Normally, both of the firms will use low-price strategy at the same time to maximize the market profits. Especially when summer holidays arrive, both of the firms will use cut-throat price competition to increase their sales so as to increase their profit. Game theory is applied to be a market share. A game theory is a pricing policy and it helps a firm to enhance profit. There are high barriers to enter this market. Coca cola and Pepsi have signed a cartel contract. The two firms will become a cartel to avoid other firm to enter this market because it will decrease their economic profit. Cartel is a small number of firms acting together to limit cost, raise price and increase profit. Neither coca cola nor Pepsi exit from this market, another firm will become a monopoly. The soft drink price will become higher.

Nataraj Pangal., 2010. Price War Analysis – Coke Pepsi [online] available at: http://www.slideshare.net/natarajpangal/price-war-analysis-coke-pepsi
Cola Wars:Coca cola vs Pepsi [online] available at: http://cokevspepsi.net/

By Goh Chau Wei