Pepsi Case Study

The Success of Pepsi Cola

Pepsi Cola, which has a broad range of products that it distributes throughout the world, is an oligopoly market structurer that has been in business for years. How was Pepsi Cola established? In which of the four economic market structures does the firm operate? What are the factors that determine the demand and supply for its products? Are there substitutes or compliments for its goods? How does demand for its products perform in terms of elasticity in the short and long run? This paper answers these questions through examination and detailed analysis.

Caleb Davis Bradham invented the recipe for Pepsi Cola in 1893. Mr. Bradham was born in Chinquapin, North Carolina, on May 27, 1867 (Trade Ideas Incorporated, 2009).

The Pepsi Cola Company falls under the oligopoly model. An Oligopoly is a market structure with few sellers, but more than two, of homogeneous or differentiated products. There are few sellers because of barriers to entry for the firms. Because the business involves expensive technology for bottling, it would require large amounts of capital to enter the business. Furthermore, the company is labor intensive employing more than 264,000 employees worldwide (Pepsico number of employees, n.d.). This limits the competition. Pepsi Cola’s non-alcoholic drinks compete with companies like Dr. Pepper and Coca Cola. Because there are so few firms that the company competes with, every move they make regarding price, quantity produced or advertisement, influences the behavior of the other firms. Furthermore, if the other companies make the same moves, then they influence Pepsi Cola’s actions. Pepsi Cola and its competitors not only produce soft drinks, they also produce other non-carbonated drinks and food items. This would classify the company as an Imperfect or Differentiated Oligopoly. The goods they produce have their own distinguishing characteristics but are all close substitutes. Moreover, these firms can influence prices, but they avoid this for fear of a price war. They follow a policy of price rigidity. This is where the price stays fixed

Freshly squeeze juice might be a substitute for a processed bottle of juice and tap water might be a substitute for bottled water.

Company performance in terms of elasticity in the short and long run help Pepsi Cola determine capacity, production and pricing under the conditions of oligopoly. In the short run, Pepsi Cola must look at how competing sellers set prices, whether the product is homogeneous or differentiated and how it should adjust price in response to competitor’s price changes. The company could apply the Hotelling model of oligopoly. This is where the company competes on price to sell a product differentiated by distance from the consumer. For example, suppose there is a store that sells Pepsi Cola and store a mile away that sells Coca Cola. Each has priced its drinks the same. Consumers closest to the Pepsi store will buy their product and consumers closer to the Coca Cola store will shop there. However, if Coca Cola decides to raise its price, consumers may drive farther to the Pepsi store to buy drinks that are priced cheaper. The differentiation here is the difference in the consumer’s distance between the two stores. Another short run strategy is the Nash Equilibrium. This is where a company and its competitor have a strategy with each participant considering an opponent’s choice. There is no incentive and nothing to gain by switching the strategy. Each strategy and every competitor benefits because everyone gets the