Question

Coca-cola and PepsiCo are the leading competitors in the market for cola products. In 1960 Coca-cola introduced Sprite, which today is among the worldwide leaders i the lemon-lime soft drink market and ranks in the top 10 among all soft drinks worldwide. Prior to 1999, PepsiCo would continue to earn a $200 million profit, and Coca-cola would continue to earn a $300 million profit. Suppose that by introducing a new lemon-lime soft drink, one of two possible strategies could be pursed: (1) PeopsiCo could trigger a price war with Coca-cola in both the lemon-lime and cola markets or (2) Coca-cola could acquiesce and each firm maintain its current 50/50 split of the cola market and split the lemon-lime market 30/70 (PepsiCo/Coca-cola). If PepsiCo introduced a lemon-lime soft drink and a price war resulted, both companies would earn profits of $100 million. Alternatively, Coca-cola and PepsiCo would ear $275 million and $227 million, respectively, if PepsiCo introduced a lemon-lime soft drink and Coca-cola acquiesced and split the markets as lists. If you were a manager at PepsiCo, would you try to convince your colleagues that introducing the new soft drink is the most profitable strategy? Why or why not?

Answer 1