Coca-Cola is one of the world’s top selling soft drink companies. Coca-Cola has continuously progressed since it began 1886. A pharmacist in Atlanta named Dr. John S. Pemberton created a unique soft drink flavor that could be sold at soda fountains. The credit for the name and trade mark goes to Frank M. Robinson. Frank was Dr. Pemberton’s partner and bookkeeper. Today Coca-Cola is the manufacturer of over 500 brands of products sold in over 200 countries worldwide. The Coca-Cola Company operates in an oligopoly. An oligopoly is a market structure in which there are only a few firms and firms explicitly take from other firms’ likely response into account; there are often significant barriers to entry that prevent smaller firms from making an impact(Colander, 2013).
There are several different reasons why Coca-Cola is an oligopoly. Only two firms dominate the majority of the market share, Coca-Cola and Pepsi. There are other smaller firms in the market, but their market share in the industry is very small when compared to these two major firms. Small companies do not have the financial capital to start a brand on a massive scale. For, small companies, the barriers to entering the industry are too high. The high operating cost of production in the soft drink industry prevents companies from entering the soft drink market.
Oligopoly has previously been defined as a market structure in which there are only a few firms and firms explicitly take from other firms’ likely response into account; there are often significant barriers to entry that prevent smaller firms from making an impact(Colander, 2013). A few firms mean the number of firms has to be significantly low, as in this case two Coca- Cola and Pepsi, for there to be acknowledgment that each firm aware that its future prospects depend on both its policies and the policies of its rival. 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 firm’s products are close substitutes for one another that have a high and positive cross elasticity of demand (WEI, 2012). Coca-Cola and Pepsi are in an oligopoly market. Both companies sell the same product, giving them power over pricing, both companies will take into consideration each other’s actions are changing the prices of their products. Prices of their goods usually change according to the kinked demand curve.
The kinked demand curve theory is an economic theory about oligopoly and monopolistic competition. If other firms ignored price increases and price decreases brought about lowering of prices by competitors, the firm will have a demand curve with the kink at the present market price of P*. Firms believe that a kinked demand curve is brought about from basic strategic considerations. Usually, low pricing strategy is used by both firms simultaneously to increase market profits. As the summer holidays approach, the firms will use harsh competition practices to buildup sales, and in turn increase 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 (WEI, 2012). The barriers are high to enter this market.
Coca-Cola and Pepsi have signed a cartel contract. The two firms will become a cartel to avoid other firm from entering 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 (WEI, 2012). Monopolistic competition is present when the market has multiple sellers marketing differentiated products. Retail trade can be used as an example. Oligopoly represents a steady market form where a few sellers dominate in the market and each firm has a certain amount of share of the market. Both firms are aware of their dependence on each other.
Coca-Cola and Pepsi take part in non-price product differentiation. Product differentiation is the process of distinguishing a service or product from other products, to make it more appealing to a targeted market. On a rare occasion, will you see Pepsi try to challenge Coca-Cola in pricing. These two companies use creative advertisement instead. Another competitive strategy that, can be used by Coca-Cola is to produce their product globally. Coca-Cola will need to obtain contracts with restaurant chains to be their sole distributor of soft drinks.
By partnering with major food chains, it guarantees that consumers on have the choice of purchasing their product. If you only have one choice, it is almost a guarantee your product will be purchased. Product packaging, which is also another form of product differentiation. Coca-Cola cans and bottles are constantly changing to give consumers a new sense of worth. If Coca-Cola did not keep its packaging updated, Pepsi would gain market share from consumers who have become bored Coca-Cola customers.
Loyalty programs can be used to gain customer loyalty. Coca-Cola can offer discounts and free products to customers who buy large quantities of their product. Loyalty programs would provide an encouragement for customers to stay loyal to the Coca-Cola brand. Product line expansion, by expanding their product line Coca-Cola will be able to reach a wide variety of customers. With the growth of the global economy, Coca-Cola will need to target the tastes of certain customers. An example would be; people’s soft drink choices are different in Asia than they are in Africa. There will have to do an enormous amount of research and testing to find the right products for these markets. Although the investment will be costly, it will prove to be valuable in the long run.
Coca-Cola is in an oligopoly market for obvious reasons. Coca-Cola and Pepsi dominate the soft drink market. There are significant barriers to entry that prevent smaller firms from making an impact on the market. Because of their dominance, the two companies can compete in area like marketing and product expansion to maximize profit. Success is driven by product differentiation through product packaging and advertising. By putting into place loyalty programs and expanding the product line, Coca-Cola will continue to be the top selling soft drink company.
Lin, H. (2012). Coca-Cola vs. Pepsi: The Economics behind Coke’s Dominance. Retrieved from http://economicstudents.com/2012/10/coca-cola-vs-pepsi-the-economics-behind-cokes-dominance/ Wei, G. C. (2012). Oligopoly-Coca-Cola & Pepsi. Retrieved from http://economicsdicussion.blogspot.com/2012/11/oligopoly-coca-cola-pepsi.html Octotutor. (2014). The Market Structure of the Coca-Cola Company. Retrieved from http://octotutor.com/the-market-structure-of-the-coca-cola-company/