Is Price War a Dominant Strategy for Oligopoly?

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Managerial Economics - Group(Y) Project

Is Price War A Dominant Strategy for Oligopoly?

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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.

Many international markets are also dominated by Coca-Cola and PepsiCo, but include other companies such as Groupe Danone, Nestle SA, and Suntory Holdings Limited.

Stimulants in soft drinks

People crave soft drinks because they contain two stimulants—sugar and caffeine. Also, the water in soft drinks hydrates. Soft drinks contain considerable amounts of sugar, which is a form of carbohydrate. Consumption of excess sugar releases a hormone called dopamine, which induces pleasure in the brain.

Caffeine, another key ingredient, stimulates the nervous system, and helps you to stay awake or restores alertness. With its slightly bitter taste, caffeine’s also used to enhance the flavor of carbonated soft drinks.

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.

Coca-Cola and PepsiCo duopoly

America, were a nation with rivalries of its democratic tradition in which Coke and Pepsi had no choice to escape, they have shown how they were in normal warfare and while time pass by they went on to unhealthy way. Coke and Pepsi changed the consumer’s perception by the way they were conducting their business. E.g Coke’s destructive price war in 1980s.  [pic 3]

It started in early 1970s they were offering similar products with the same look and taste. Even though they had price diversification, product alterations and upgradation practices kept them rejuvenating the market, they faced pressure for more innovations, something differ from each other to gain competitive advantage. They started with price war and moved towards Ad War and marketing of products was the path chosen to generate competitive advantage and public interest. They realized Advertisement war would be the best strategy than price war to achieve their goals effectively.