Pepsi Challenge

1 Introduction

In May 1975, Pepsi-Cola launched an advertising campaign called “The Pepsi Challenge” that started in Texas and quickly reached almost every city of the United States. This campaign consisted of a simple blind taste test where consumers were asked to take a sip from unlabeled glasses, one of them containing Coke and the other one containing Pepsi. By doing this, Pepsi believed that the taste preferences would be revealed as the company believed that the inclination toward Coke was mainly due to habit reasons and that Coke was trying to hide behind advertising campaigns that gave no attention to actual taste. The result of this campaign was that consumers usually preferred the unlabeled glass that contained Pepsi. These findings were immediately published by Pepsi as means to advertise their product and ultimately to increase their sales and profits.

In this paper, I will examine whether the campaign resulted in an appreciation of Pepsi's stock price. If it turns out that the campaign had a positive impact on Pepsi's returns, the company might want to re-launch the campaign and consider using it as a competitive advantage over its main competitor Coke. My goal in this paper is to determine whether the firm's belief that customers were choosing their product according to habits rather than to true taste preferences is well-grounded. The analysis will allow us to determine if the campaign effectively shifted consumption from one product to the other which ultimately would result in changes in the valuation of the two rival companies.

I find that the campaign did not have a significant effect on Pepsi’s stock returns. Additionally, I bring forward (in Section 5) the reason that explains the campaign statistical results that lead to the conclusion that consumers preferred Pepsi to Coke: The campaign results were, in fact, affected by a feature of the campaign test setup. The non-random labeling of the Pepsi and Coke glasses with the letters “M” and...