The Coke Pepsi Rivalry in Indian markets
Presented by:
Milana Borisev
April 9, 2007.
Abstract
This paper details duopoly market fights between two rivals in Indian market and the
various ways of conflict resolution. Cola giants, Coke and Pepsi, entered the Indian
market and while they were entering they brought with them cola wars which become
long time ago the global issue. This case also constructs the new model, using Bertrand’s
duopoly model, to identify the price level that each firm is willing to sell for in ignorance
of other’s firm actions.
1. Introduction of the Topic
-
The war between two largest soft drink industries had become part of the global
folklore back in 1938. Over a hundred years of the war, between Coke and Pepsi, had
changed many things not just in their ways of conducting business but also in minds of
consumers. In the beginning, war between Coke and Pepsi was considered such a normal
thing because in the nation such as America, rivalries were part of its democratic
tradition. While time was passing war between those two rivals became very unhealthy.
One example of these unhealthy levels was Coke’s destructive price war practices in the
early 1980s.1
- In the early 1970s Coke and Pepsi started offering same product with the same look
and taste. However, both of the bottling companies kept rejuvenating the market through
different promotion practices, price diversification and product modifications. Each of the
companies was under pressure to introduce something more and different form the other
product in order to maintain or gain competitive advantage. The only way those two
rivals could control the market is to explore and implement new tactics to generate
consumer interest. Each of the companies would do anything to generate public interest.
On of the ways that coke decides to go in order to gain competitive advantage was to
enter the Indian market. 2
- Coke had entered the Indian market back in 1970s. The soft drink market was
controlled by Coke since the 1977 when it had to exit the country following policy
changes regarding Multi National Corporations operating in India. From the 1994 to1998
Pepsi controlled the largest percentage of soft drinks market in India. During the 1994 to
1
2
Management review , January 1985,: “Thoughts from the front”
ICFAI Center for Management Research , 2001:” Pepsi vs. Coke”
1998 period Indian market was the only market where Pepsi had control over the market
and not the Coke. While Pepsi controlled the market they did not really pushed hard to
expand their capital and to gain customers trust because they had monopoly for that time.
In 1998, after four years of break Coke wants to re-enter the market and that’s the point
when the war between two markets in India starts. One of the latest rounds of disputes
between Coke and Pepsi has Pepsi dragging Coke to the court and accusing it of unfair
practices that are conducted in order to regain its advantage that it has lost in past four
years. Also one other thing that Pepsi is accusing Coke for is that it is trying to steal their
workers by overpaying any worker that decides to move to work for Coke instead of
Pepsi. Coke has been accused of taking three of Pepsi’s key sales personnel and offering
them almost as five times much as Pepsi pays them. On the other side, Coke is saying
that they did not take over Pepsi’s workers, they just offered them what they asked for. 3
Going even further in to the battle and the advertising war between Coke and Pepsi the
end result is that the two companies had restricted themselves to pitched battles in the
marketplace , which was beginning to peak with the over the top advertising battle.4 The
bottom line of this advertising battle is that both companies are just trying to increase
their permanent sales, by doing anything that is necessary in order to defeat its
competitor, without really trying to concentrate on the important factors that could ensure
their long-term gain. This short term goals, which involve unhealthy levels of business
conduction, could hurt both of the companies by losing its share of Indian market and
also customers trust.
3
4
India Today , May 4,1998: Cola Quarrels” , pages 1-3
India Today , May 4,1998: Cola Quarrels” , pages 1-3
2. Bertrand’s model of duopoly
- Bertrand’s duopoly model is describing the competition in duopolistic market in
terms of price, in which competitors are selling identical product, and each are assumed
to select a price level in ignorance of other action. It is a game in strategic form and
solution suggests a non cooperative equilibrium. Each of the firms in Bertrand’s model
chose a price, and produces enough output to meet the demand it faces, given the prices
chosen by all the firms.5
- The Economic setting for the Bertrand’s model is assuming that the single good is
produced by n-firms and each of the firms can produce q units of good at a cost of C.
Also normal demand function D is used to specify the demand for the product. The
interpretation of D is that if the good is available at the price p, then the total amount
demanded is D (p). Bertrand’s model also assume that if the firms set different prices ,
then all consumers purchase the good from the firm that sells for the lowest price, which
also produces enough output to meet the demand. In the case where more than one firm
sets the lowest price, than those firms that did so will share their demand at equal price.
On the other hand, a firm whose price is not the lowest price receives no demand and
produces no output. Each of the firms will produce that much output just enough to
satisfy the demand.
Set up for the Bertrand’s duopoly strategic game:
5
-
Players: Two firms
-
Actions: Each firm’s set of actions is the set of possible prices
-
Preferences: Each firm’s preferences are set by its profit.
Martin J.Osborne, 2004: “An Introduction to game theory” ; Chapter 3, pages 63-65
3. Model construction
- As I mentioned in first section, Coke and Pepsi rivalry in Indian market is very
important for each of the companies and both of them would do what ever it takes to gain
competitive advantage and control over the marketplace. I will also use Bertrand’s model
of duopoly as a tool to explain the decision making and competition in terms of prices,
and possible conflict resolution between Coke and Pepsi in Indian market.
1. Players: Coke and Pepsi
2. Actions: Each firm set of action is set of possible prices p1-Coke and p2- Pepsi
3. Preferences: Each firm wants to maximizes its profits
- We assume that in this strategic game there is no cooperation between Coke and
Pepsi in terms of the price. Each of the firms will set its own price, without knowing in
advance what other firm will do. Both, Coke and Pepsi are aware that in order to obtain
all the profits it has to set lower price, for the bottle of drink, than its competitor. Also,
neither Coke nor Pepsi will set the price of one bottle that is lower that its production cost
of that bottle. Even if Coke and Pepsi set their beverages under a different name, all of
the costumers in India know that the product that they sell is exactly the same.
Both Pepsi and Coke know from the experience that the demand for their beverages is,
P= a – Q (Q=a-P) and TC=CQ,
where P is the price of bottle of the beverage, and Q (Q=q1+q2) is overall quantity of
coke and Pepsi beverages sold by two firms, and a is a constant. TC is assumption that
we deal with constant cost industriers C.
 We will assume that the cost of producing one bottle for Indian market is 50
cents, for both Coke and Pepsi.
 As I mentioned both firms are profits maximizing firms.
 If p=c firm makes no profit
 Because the cost of producing each unit is same, equal to c, firm Y (Coke) makes
the profits p1-c and firm two X, Pepsi, makes the profits equal to p2-c.
Profits = Revenue-Cost
Π= p*q-cq and p=0 if p<c6
Π= ( p1-c) (a-p1 ) for Coke and
Π= ( p2-c) (a-p2) for Pepsi)
Profits:
1)
If Coke charges $1 for bottles of coke and Pepsi charges $2 for bottle of Pepsi then
Coke takes all profit which is $1.50 per bottle:
If
p1<p2
then
ΠX= ( p1-c) (a-p1)
(If instead Coke (X), Pepsi (Y) charged lower price per bottle than Pepsi would obtain all
profit and would get nothing)
2) If Coke charges same price as Pepsi for one bottle of drink, lets say $1, then they
would share profit. Coke would make 50 cent per bottle so would Pepsi
If
6
p1=p2 then
ΠX=1/2 ( p1-c) (a-p1)
Martin J.Osborne, 2004: “An Introduction to game theory” ; Chapter 3, pages 66
3) If Coke in this case decides to charge $2 per bottle of drink and Pepsi charges $1 per
bottle of drink then Coke would not make any profit:
If
p1>p2 then
ΠX=0
(If instead Pepsi is the company that decides to charge $2 per bottle of drink and Coke $1
than Pepsi would not make any profit)
- From the previous example we could see that the firm which charges the lower price
will obtain all profit, and other firm which charges higher prices per bottle of drink will
get BIG FAT ZERO. Now we have seen what the profits of each firm are, but in order to
find Nash equilibrium, first we need to find firms best response function given what other
company does.
Best response function:
1) If Pepsi charges $1 per bottle of drink and Coke knows that, then Coke would
charge 80 cents per bottle of drink because it still makes a profit
Bx (py) = p1<p2 if p2>c
- Same best response function would be for Pepsi if it new that Coke would charge
$1 per bottle of drink, then it would charge 80 cents per bottle. Now Pepsi’s best response
function given what Coke is doing is:
By (px) = p2<p1 if p1>c
2) If in this case Coke new that Pepsi would set its price to be 50 cents which is equal
to cost, then only thing that Coke would do is to set the same price of 50 cents per bottle
Bx (py) = p1=p2 if p2=c
- Same response would be for Pepsi if it new that Coke would charge the price of 50
cents per bottle. Only price that Pepsi could charge if it wants to stay in business is 50
cents. So in this case Pepsi’s best response function is follow:
By (px) = p2=p1 if p1=c
Now we can see that at the end both Pepsi and Coke we be lowering their prices in order
to get all profits but at the end their price would be equal to cost p1=p2=c. If they
cooperated they could set the monopoly price where both of the companies could make
higher profits, but from their incentives to cheat that could never happened.
4. Conclusion
- Bottom line for this paper is that this long term war between Coke and Pepsi in
India would probably last forever because both of the companies are only concerned
about the profits and how they will benefit more and more. Most of the concerns that
different experts have is that how long they will survive using that strategy and at the end
who will benefit and who will lose.
- Also from the Bertrand’s model we could see that if we assume that two companies
do not cooperate, due to their incentives to cheat, at the end they will both be worst of
then if they cooperated. Both of the companies decide to charge its own price for the
bottle of drink, which would be at the lower price than its competitors charge and at the
higher price than production cost of one bottle, which at the end would lead to the price
that is equal to the production cost.
- In August 2004, Coke and Pepsi had decided to join their hands together and to raise
the prices of soft drinks. Both of the companies stated that the reason for doing such a
thing is that the too low prices were for them lose-lose situation. Both of the companies
were experiencing very high sales in Indian market, but in order for them to increase their
profits they needed to increase their prices. As of August 2004, price of 200ml pack and
300ml pack increased by Re1 while larger bottles are more expensive by 10-12 per cent.
Even with the increase in the prices of Pepsi and Coke, consumption of those two
products remained same. Also, this pricing action was aggressively supported by strong
advertising to expand the consumer base from 160 million consumers in 2002 to 250
million consumers in 2004. 7
7
Mohini Bhatnagar, 24 August 2004:”Pepsi, Coke join hands to raise prices”.
References:
1. Management review, January 1985,: “Thoughts from the front”
2. ICFAI Center for Management Research , 2001:” Pepsi vs. Coke”
3. India Today , May 4,1998: “Cola Quarrels”
4. Martin J.Osborne, 2004: “An Introduction to game theory” ; Chapter 3
5. Mohini Bhatnagar, 24 August 2004:”Pepsi, Coke join hands to raise prices”.