This article is about Coca-Cola and PepsiCo, and the implications on the 200ml segment in the cola industry in India, due to a decrease in price by Coca-Cola. 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 article, co*ke-Cola has decided to cut it`s 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 (as mentioned in the article) 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 co*ke achieve large-scale production and consequently lower average total costs in the long run due to benefits of economies of scale.
In 2003 co*ke-Cola introduced it`s 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 The Kinked Demand Curve modelThe 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. co*ke 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 co*ke's market share. The longer Pepsi allows co*ke 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 co*ke 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.
