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Category: Business and Industry

Date Submitted: 02/01/2012 09:55 AM

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Coca-Cola and Pepsi are the dominant players in the carbonated soft-drink industry with Coca-Cola accounting for about 40% of the market; and its strongest competitor Pepsi accounting for about 30% of the market.

The game theory can be used to explain their competitive behavior as the two main players in the market. In the 1950s in an attempt to have a larger market share, Pepsi introduced the “Beat Coke” theme where it introduced a 26 ounce bottle for 5 cents. Coca-Cola stayed with its 6.5 ounce bottle for the same price. Based on this, Pepsi growth exploded and they became Coca-Cola strongest competitor. Coca-Cola took the strategy to maintain its original position. However, this caused a negative pay off for Coca-Cola. In a counter reaction, Coca-Cola cut its costs by using corn syrup instead of sugar. Coca-Cola also doubled its advertising.

Coca-Cola and Pepsi also demonstrated the gaming strategy in the 1960’s by experimenting with cola and non-cola flavors. In 1960, Coca-Cola took the lead with Fanta and Pepsi followed with Teem. Then Coca-Cola came out with Sprite and Low-calorie Tab and Pepsi followed the next year by releasing Mountain Dew and Diet Pepsi. Coca-Cola then lead the market in a different direction by purchasing non-soft-drink products. Coca-Cola purchased minute maid, Duncan foods, and Belmont springs water. Pepsi gained position in 1965 when they merged with Frito lay.

In 1986, Coca-Cola bottling division sold 51% of shares to the public. Pepsi followed the same strategy in 1999 by selling the shares of its Bottling Company and retaining 35% equity stake.

The Pepsi challenge started in Texas and the bottlers had public blind tastes to prove that Pepsi tasted better. This stunt increased sales for Pepsi significantly as they gained a 1.4% increase in stores. Coca-Cola responded by offering rebates and renegotiations with their bottlers. Coca-Cola also tried to change its formula but this strategy failed.

The conclusion about this type of...