The Price Theory of Coca-Cola Company
The Price Theory of Coca-Cola Company
Coca-Cola is a well-recognized soft drink brand in United States. According reports from Coca-Cola in 2012.Coca-Cola Company sells its product around the world in more than 200 countries and has a product portfolio of more than 35,000 drinks. Based on Interbrain’s best global brand 2011, The Coca-Cola brand is worth $74 billion and therefore was the world’s most valuable brand.
The market type of the Coca-Cola Company
The Coca-Cola Company is a monopoly, because Coca-Cola has the ability to affect market prices through its actions. Despite the report from the Web of Coca-Cola, Coke has been a firm leader in the U.S. carbonated drinks market, with 42.8% market share and Pepsi’s 31.1%. Therefore, the market, which Coca-Cola belongs, is not a perfectly competitive market. As a result, we can conclude that Coca-Cola has Monopoly power for it faces a downward-sloping demand curve, displayed in Chart 1. Because the Coca-Cola is a Monopolist, it can decide both it’s price and supply. A monopolist has no supply curve. In order to maximize the profit, the Company choose where MR=MC. Therefore, the price of Coca-Cola is P and the quantity is Q. The consumer surplus is in area B and the supplier surplus is area A, and the deadweight loss is in area C. The area C is the amount by which the consumer’s losses exceed the producer’s gain.
The sources of Coca-Cola Monopoly power
The Coca-Cola owns around 100 brands in US, such as Sprite, Dasani, Nestea, Monster, Fanta and so on. Coca-Cola uses overlapping technologies to produce multiple products in same factory by using same equipment. This method benefits a lot to the Coca-Cola, which allow the product line to operate more efficient than the small company and specialized company. Meanwhile, it also greatly improve extend the market share of the Coca-Cola and gain more consumers to make more profits. Therefore, Coca-Cola enjoys the monopoly power through the economics of scope.
Monopolistic competition: Coca-Cola VS Pepsi Co
The war between Coca-Cola and Pepsi Co has been last for a decade. The most famous case is in 2008, PepsiCo accused Coca-Cola Co of monopolizing the market for fountain-dispensed soft drinks in the United States (Desert News, 1998). Monopoly indeed can greatly improve the profits of the company and enlarge the market share of the firm. Therefore, many companies such as Coca-Cola will take measures to control the distributers to sell more products of its company. Such as: In 2005, Coca-Cola Export Corporation (Coca-Cola’s Mexican unit) and a number of its distributors and bottlers were fined $68 million for unfair commercial practices (en.wikipedia.org/wiki/Criticism of Coca-Cola). As to most of the people, the taste of the Coke of Coca-Cola or Pepsi is the same. The only difference may be the appearance. In fact, the products from the Coca-Cola and the products from are close substitutes and expect for sacrificing for the market share, those products cannot be priced very differently from the other.
So, that’s the reason why the price of the Coke from two different companies is about the same price-around $1.5 for a 20 oz. Coke. This two company are in a monopolistic competition markets in which there are many similar but differentiated products. Char 2 and Chart 3 illustrate the conditions of the Coca-Cola both in the short run and in the long run under the monopolistic competition. In the short run, the Coca-Cola company will choose produce its quantity where MC=MR, at which point the price is P. The Coca-Cola Company is making profit in the short run, because the price P exceeds the average cost of the product P0 at the quantity Q.
However, in the long run, these products will attract other companies (such as Pepsi Co) to entry the market and sell similar product to compete with Coca-Cola. As a result, some consumers will choose other brands and the demand for the coke form Coca-Cola will decrease. Therefore, the demand curve and marginal revenue curve will both shift downward, as D’ and MR’ in the Chart 3.This will attribute to the new price P’ and new quantity Q’, both the price and quantity are decrease because the competitor’s entry. At this point, the price is equals to the average cost, and the profits are zero. There will be no further entry at this price. So, that’s can explain why Coca-Cola has monopoly power but still sell its products at a low price.
Products differentiation of the Coca-Cola Company
As the conclusion given above, the Coca-Cola cannot decrease the price or improve the quantity to attract the consumer. So, what should Coca-Cola do to attract more consumers? There is one strategy: Product Differentiation. The Coca-Cola Company can invest more in advertisement or do some charities to improve the social welfare to gain the trust and preference of consumers. Some measures are already been taken, such as: fund HIV/AIDS programs in Africa and support community improvement in those poor areas; revise the bias of drinking coke leads to the obesity through the advertisement; implement water source protection plans to preserve and improve local water sources. All those methods are effective to lure more consumers to buy more of its products.
University/College: University of California
Type of paper: Thesis/Dissertation Chapter
Date: 21 October 2016
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