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Soft Drink Industry:

A soft drink is a drink that usually contains carbonated water (although some lemonades are not
carbonated), a sweetener, and a natural or artificial flavoring. The sweetener may be
a sugar, high-fructose corn syrup, fruit juice, a sugar substitute (in the case of diet drinks), or
some combination of these. Soft drinks may also contain caffeine, colorings, preservatives,
and/or other ingredients.
Soft drinks are called "soft" in contrast with "hard" alcoholic drinks. Small amounts
of alcohol may be present in a soft drink, but the alcohol content must be less than 0.5% of the
total volume of the drink in many countries and localities if the drink is to be considered non-
alcoholic. Fruit punch, tea (even kombucha), and other such non-alcoholic drinks are technically
soft drinks by this definition, but are not generally referred to as such. Unsweetened sparkling
water may be consumed as an alternative to soft drinks.

Two Majors Players in Soft Drink Industry:


1. PepsiCo: PepsiCo is a world leading manufacturer of food and beverages that sells its
products in more than 200 countries with a portfolio of iconic and prestigious soft drink
brands like Pepsi-Cola, Frito-Lay, Gatorade, Naked Juice, Quaker, Lipton, Marinda, Kero
Coco, and many others. PepsiCo is one of the world’s largest soft drink companies that
offers products on categories including juice and smoothies, carbonates, and bottled
water. The company is involved in sustainable growth by building and expanding its
performance with purpose motto. It mainly focuses on three main goal sections: People,
Products, and Planet. PepsiCo’s recent acquisitions include SodaStream and Bare foods.

2. Coco-cola: The Coca-Cola Company, one of the world’s largest soft drink companies,
is the home to some of the top soft drink brands including Coca-Cola, Fanta, Sprite, and
Diet Coke. Other most-recognized brands include vitamin water, Minute Maid, and
Powerade. The Coco-Cola company owns and sells more than 500 beverage brands with
products sold under several categories including waters, energy and sports drinks, juice
drinks, ready-to-drink teas and coffees, and mainly sparkling drinks. The company’s
products are sold to customers across 200 countries worldwide. The non-alcoholic
beverage brand acquired a 16.7 % stake in one of the leading energy drink companies,
Monster Beverage Corp.
Oligopoly in soft drink industry
Two firms control 74 % of soft drink sales:
42.8% coca-cola’s 25 brands and 139 varieties.
31.1% Pepsi’s 18 brands and 163 varieties.
Coca-cola and Pepsi are in an oligopoly market. They are mutually and strategically
interdependent, as a decision made by one firm invariably affects the other. They are selling the
homogeneous product so they can control over price.
Salient Features of Oligopoly Market:
1. Interdependence:
The foremost characteristic of oligopoly is interdependence of the various firms in the decision
making.
This fact is recognized by all the firms in an oligopolistic industry. If a small number of sizeable
firms constitute an industry and one of these firms starts advertising campaign on a big scale or
designs a new model of the product which immediately captures the market, it will surely
provoke countermoves on the part of rival firms in the industry.
Thus, different firms are closely inter dependent on each other.
2. Advertising:
Under oligopoly a major policy change on the part of a firm is likely to have immediate effects
on other firms in the industry. Therefore, the rival firms remain all the time vigilant about the
moves of the firm which takes initiative and makes policy changes. Thus, advertising is a
powerful instrument in the hands of an oligopolist. A firm under oligopoly can start an
aggressive advertising campaign with the intention of capturing a large part of the market. Other
firms in the industry will obviously resist its defensive advertising.
Under perfect competition advertising is unnecessary while a monopolist may find some
advertising to be profitable when his product is new or when there exist a large number of
potential consumers who have never tried his product earlier. But according to Prof. Baumol,
“under oligopoly, advertising can become a life-and-death matter where a firm which fails to
keep up with the advertising budget of its competitors may find its customers drifting off to rival
products.”

3. Group behavior:
In oligopoly, the most relevant aspect is the behavior of the group. There can be two firms in the
group, or three or five or even fifteen, but not a few hundred. Whatever the number, it is quite
small so that each firm knows that its actions will have some effect on other firms in the group.
In contrast, under perfect competition there are a large number of firms each attempting to
maximize its profits.
Similar is the situation under monopolistic competition. Under monopoly, there is just one profit
maximizing firm. Whether one considers monopoly or a competitive market, the behavior of a
firm is generally predictable.
In oligopoly, however, this is not possible due to various reasons:
(i) The firms constituting the group may not have a common goal
(ii) The group may or may not have a formal or informal organization with accepted rules of
conduct
(iii) The group may be dominated by a leader but other firms in the group may not follow him in
a uniform manner.

4. Competition:
This leads to another feature of the oligopolistic market, the presence of competition. Since
under oligopoly, there are a few sellers, a move by one seller immediately affects the rivals. So
each seller is always on the alert and keeps a close watch over the moves of its rivals in order to
have a counter-move. This is true competition, “True competition consists of the life of constant
struggle, rival against rival, whom one can only find under oligopoly.”

5. Barriers to Entry of Firms:


As there is keen competition in an oligopolistic industry, there are no barriers to entry into or exit
from it. However, in the long-run, there are some types of barriers to entry which tend to restrain
new firms from entering the industry.
These may be:
(a) Economics of scale enjoyed by a few large firms;
(b) Control over essential and specialized inputs;
(c) High capital requirements due to plant costs, advertising costs, etc.
(d) Exclusive patents; and licenses; and
(e) The existence of unused capacity which makes the industry unattractive.
When entry is restricted or blocked by such natural and artificial barriers the oligopolistic
industry can earn long-run supernormal profits.

6. Lack of Uniformity:
Another feature of oligopoly market is the lack of uniformity in the size of firms. Firms differ
considerably in size. Some may be small, others very large. Such a situation is asymmetrical.
This is very common in the American economy. A symmetrical situation with firms of a uniform
size is rare.
7. Existence of Price Rigidity:
In oligopoly situation, each firm has to stick to its price. If any firm tries to reduce its price, the
rival firms will retaliate by a higher reduction in their prices. This will lead to a situation of price
war which benefits none. On the other hand, if any firm increases its price with a view to
increase its profits; the other rival firms will not follow the same. Hence, no firm would like to
reduce the price or to increase the price. The price rigidity will take place.

8. No Unique Pattern of Pricing Behavior:


The rivalry arising from interdependence among the oligopolists leads to two conflicting
motives. Each wants to remain independent and to get the maximum possible profit. Towards
this end, they act and react on the price-output movements of one another which are a continuous
element of uncertainty.
On the other hand, again motivated by profit maximization each seller wishes to cooperate with
his rivals to reduce or eliminate the element of uncertainty. All rivals enter into tacit or formal
agreement with regard to price-output changes. It leads to a sort of monopoly within oligopoly.
They may even recognize one seller as a leader at whose initiative all the other sellers raise or
lower the price. In this case, the individual seller’s demand curve is a part of the industry demand
curve, having the elasticity of the latter. Given these conflicting attitudes, it is not possible to
predict any unique pattern of pricing behavior in oligopoly markets.

9. Indeterminateness of Demand Curve:


In market structures other than oligopolistic, demand curve faced by a firm is determinate. The
interdependence of the oligopolists, however, makes it impossible to draw a demand curve for
such sellers except for the situations where the form of interdependence is well defined. In real
business operations, the demand curve remains indeterminate. Under oligopoly a firm can expect
at least three different reactions of the other sellers when it lowers its prices.
This happened due to the reason:
(i) It is possible that other maintain the prices they had before. In this case, an oligopolist can
hope that its demand would increase substantially as the prices are lowered,
(ii) When an oligopolist reduces his price, the other sellers also lower their prices by an
equivalent amount. In this situation although demand of the oligopolist making the first move
will increase as he lowers his price, the increase itself would be much smaller than in the first
case.
(iii) When a firm reduces its price, the other sellers reduce their prices far more. Under the
circumstances the demand for the product of the oligopolistic firm which makes the first move
may decrease. Thus, uncertainty under oligopoly is inevitable, and as a result, the demand curve
faced by each firm belonging to the group is necessarily indeterminate.
Analysis of Coco-cola and PepsiCo in Oligopoly Market:
Coca-Cola and PepsiCo are classic examples of a non-collusive oligopolistic market structure.
These firms constitute of majority of the cola industry and have not agreed to fix prices or
collaborate, formally or informally in anyway. Although they are mutually and strategically
interdependent, as a decision made by one firm invariably affects the other. According to the
sources when Coke-Cola has decided to cut its prices of the 200ml bottle from Rs.10 to Rs.8.
This reduction in price would affect their sales tremendously as this segment mostly caters to the
rural areas where people have a lower disposable income, hence making it an extremely price
elastic segment. Suggesting that a change in price can lead to a significantly larger change in
quantity demanded. A rise in demand can help Coke achieve large-scale production and
consequently lower average total costs in the long run due to benefits of economies of scale.
In 2003 Coke-Cola introduced its affordable pricing strategy in which it drastically reduced its
prices to Rs.5. Pepsi was forced to follow as it would lose a massive portion of the market share,
being a close substitute. But these two firms couldn`t sustain the market at such low prices and
both withdrew from this lower pricing strategy. Since then (for 9 years) the prices have remained
stable at Rs.10. Price rigidity in oligopolistic firms can be explained through the Kinked Demand
Curve Model The kinked demand curve represents how the pricing behavior for each firm is
strategic.
Firms in this market structure majorly resort to non-price competitive measures as their marginal
costs can fluctuate and still result in the same market price. The marginal cost of production
depends on the amount of money firms allocate to research & development and advertising. This
is done in an effort to differentiate the goods and minimize the cross-price elasticity of demand
as much as possible. Coke has reduced its price and this would lead to an expansion in it's
demand in the short term, as currently it is cheaper than Pepsi in this segment. This would lead to
an increase in Coke's market share. The longer Pepsi allows Coke to have an edge over itself in
terms of market price the more consumers it would lose in the long term. This may be because
consumers who shift from Pepsi to Coke due to lower prices, might develop a taste for the latter
product and even if Pepsi decides to reduce it's price the consumers it lost in the initial case
might not shift back.
Rival firm PepsiCo may be compelled to reduce its price to a minimum of Rs. 8 in order to
maintain its market share. Changing the price is one of the last measures firms resort to as it can
lead to harmful repercussions for all the firms in the industry, such as price wars. Which is when
companies continuously reduce their prices to destabilize their competition.
A reduction in market price in an oligopolistic market structure is always beneficial for the
consumers as it provides them with a variety of cheaper close substitutes. The only stakeholder
with a negative impact would be the firms, as lower prices would mean a lower margin of
profitability. The role of non-price competition is essential in this case as it can provide
consumers with information about alternate products. Also advertising can increase competition
between firms and contribute in decreasing their monopoly power. Although there are some
drawbacks for advertising such as it increases the cost of production thus resulting in higher
prices for consumers. It creates needs that consumers would not otherwise have, resulting in a
waste of resources. Successful advertising can lead to increase in monopoly power of a firm.

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