Week
Date
Name
Oligopoly Case in Soft Drink Market and Automobile Market
This week we studied the application of game theory in a oligopoly market where there
exist only a few major players. In an oligopoly market, what one makes depends on what
each other firm does. This reminds me of the Soft Drink Industry which is dominated by
two giants – Coke and Pepsi. So far as the price of cola is concerned, Coke and Pepsi
basically charge the same price to their comparable products. In late year 2000, Coke
announced that it would raise the retail price of two-liter bottle cola from 99 cents to
$1.19. Pepsi immediately responded with the same price hike. It seems to me that the
preference of cola drinkers is quiet stable. A price increase will not change many
customers’ drinking habit. Coke drinkers will still prefer Coke products even the price is
higher. Pepsi may not have to raise its price, but keeping price low would not lead to a
major switch of customer base. Coke will then enjoy a higher profit margin. In this case,
Pepsi imitate its archrival’s pricing strategy and both companies are better off due to
increasing price.
The auto industry, however, is a different story, although it is dominated by three major
manufacturers. The demand for automobiles is quite elastic. Consumers will always
choose the best bargain they can get. Brand loyalty is not as strong as we see in the soft
drink industry. If GM raises its sedan’s price, the other two auto makers will take the
market share from GM by keep their prices low. As a result, GM will have to give up its
high price policy. If Ford provides low rate finance or rebate to its customers, the other
two players have to do the same thing in order to keep their customers happy. That
explains why the profit margin for new cars is generally low.
Different industry definitely have different strategies even the competitive landscapes are
similar. It is essential for business executives to study the specific characters of their
industry and their competitors’ move before making any important decision.