Understanding Oligopoly in the Indian Soft Drink Market

Oligopoly, a market structure characterized by a small number of dominant firms, plays a significant role in shaping the dynamics of various industries. In the context of the Indian soft drink market, the prominent players, PepsiCo India and Coca Cola India Ltd., have established a differentiated oligopoly, creating an almost perfect duopoly. This essay explores the characteristics of oligopoly, the behavior of major players, barriers to entry, and the unique demand curve in the Indian soft drink market.

The Characteristics of Oligopoly

Oligopoly is marked by the interdependence of firms, where changes in price or output by one firm directly impact its rivals.

In the soft drink industry, both PepsiCo and Coca Cola have been operating for nearly three decades, displaying a pattern of simultaneous pricing moves. Initially, Coca Cola set prices based on production costs, but with the entry of Pepsi and other competitors, a shift towards competition-based pricing emerged.

Coca Cola revolutionized the market with its Rs. 5 pricing strategy, catering to the price-conscious Indian consumers.

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Pepsi, on the other hand, adopts a flexible pricing strategy, quickly adjusting prices in response to competitors' actions. The focus on non-price competition, such as product design and advertising, is evident, showcasing the firms' inclination towards maximizing sales rather than immediate profits.

Behavior in Oligopoly: Group Dynamics

Examining oligopoly behavior involves understanding the dynamics between major firms. With only two major players in the Indian soft drink industry, their behavior can be viewed as a group. This group behavior is characterized by a level of unpredictability, as firms may either collaborate for mutual benefit or engage in competitive strategies to undermine each other.

Unlike theories of perfect competition and monopolistic competition, which assume individual profit maximization, oligopolistic behavior is harder to predict. The interdependence of PepsiCo and Coca Cola in the Indian market makes their actions and reactions a subject of anticipation rather than precise prediction.

The group behavior can be seen in various aspects, such as simultaneous adjustments in pricing and the competitive moves in product innovation and advertising. This collective approach often leads to a delicate balance between cooperation and competition, shaping the industry's landscape over time.

Non-Price Competition in the Soft Drink Industry

Non-price competition takes center stage in oligopolistic markets, as firms seek to differentiate themselves through product design, advertising, and packaging. This phenomenon is notably apparent in the Indian soft drink industry. Each time Pepsi introduces a new logo in labeling, Coca Cola responds with a similar move. Advertisement campaigns by one company trigger responses from the other, creating a constant cycle of innovation and imitation.

The firms are driven not solely by profit maximization but also by the desire to enhance sales and turnover, affecting current profits. In the soft drink market, carbonated drinks hold a 50% share, with Coca Cola claiming 50% and Pepsi 45%. This emphasis on market share and sales volume highlights the non-price competitive strategies employed by these oligopolistic giants.

Barriers to Entry in the Soft Drink Market

The Indian soft drink market exhibits high barriers to entry, limiting the influx of new competitors. Network bottling agreements with existing bottlers, significant advertising expenditures, strong brand loyalty, and challenges in securing retail distribution contribute to the duopolistic nature of the market.

Advertising Spend

The industry giants, Coke and Pepsi, invest heavily in advertising, making it challenging for new entrants to compete and gain visibility. The extensive brand equity and loyalty they have built over the years pose a formidable barrier for newcomers attempting to match their scale in the marketplace.

Retail distribution further adds to the entry barriers, as retailers enjoy substantial margins from soft drink sales. Convincing retailers to carry new products in place of Coke and Pepsi becomes a tough challenge for potential entrants.

Fear of retaliation is another deterrent for new entrants, as entering a market dominated by established rivals like Pepsi and Coke could lead to price wars, negatively impacting the newcomer's position.

Another noteworthy aspect of the barriers to entry is the concept of network bottling. Both Coke and PepsiCo have franchise agreements with their existing bottlers, giving them exclusive rights in specific geographic areas. This exclusivity prohibits bottlers from taking on new competing brands, making it challenging for new entrants to find willing distributors for their products. The recent consolidation among bottlers and the backward integration with both Coke and Pepsi buying significant percentages of bottling companies further solidifies this barrier.

Building new bottling plants as an alternative strategy for entry is also hindered by significant capital requirements. The efficient plant capital requirements in 2009 were estimated to be more than $500 million, making it a capital-intensive effort for new entrants.

The Kinked Demand Curve in the Indian Soft Drink Industry

Within the Indian soft drink industry, a perfect duopoly scenario has resulted in a constant price since 2005, as both firms strive to maximize profits through market share. The demand curve exhibits a kink due to the interdependence of the firms and their strategic pricing decisions.

Kinked Demand Curve

The kinked demand curve in the soft drink industry reflects price rigidity or stickiness, where a single price persists for an extended period unless significant cost or external factor changes occur. If one firm increases its price, the rival follows suit, resulting in a decrease in quantity demanded. Conversely, a decrease in price by one firm does not lead to a substantial increase in quantity demanded.

Both Coca Cola and Pepsi have experienced this phenomenon, with simultaneous price adjustments maintaining a stable demand. For instance, the introduction of the Rs. 5 pricing strategy by Coca Cola and subsequent adjustments in response to market conditions illustrate the kinked demand curve dynamics.

Notably, the soft drink industry in India has witnessed variations in bottle sizes and pricing strategies over the years. For example, in 2002, Coca Cola introduced a 200ml bottle priced at Rs. 5/-. This move was a departure from the long-standing 300ml bottle priced at Rs. 10/-. In 2005, after a hiatus in production due to lower-than-expected sales, the price of the 200ml bottle was revised to Rs. 8/-. Additionally, 600ml PET bottles, introduced in 2002 for Rs. 20/-, saw a price revision to Rs. 25/- in 2005 due to increased costs associated with plastic polymers and a rise in fuel prices.

The interesting aspect of these changes is the synchronized response from both Coca Cola and Pepsi. Despite adjustments in bottle sizes and prices, the demand remained relatively constant, showcasing the resilience of the kinked demand curve and the strategic coordination between the two major players.

Conclusion

The Indian soft drink market, dominated by PepsiCo and Coca Cola, exemplifies a stable oligopoly with limited threats from new competitors. The industry's resistance to disruptive technological forces, coupled with the accumulated brand equity of major players, sustains their market dominance. The ongoing interdependence between the two giants and the unique characteristics of the demand curve contribute to the market's stability and resistance to significant changes.