Eco 561 - Market Structure and Pricing Power

Market Structure and Pricing Power

Omini Akpang

ECO/561

April 19, 2016

Henry Dzakwasi

Market Structure and Pricing Power

Coca-Cola is a carbonated soft drink sold in restaurants, hotels, diners, and even gas stations worldwide. Simply known as Coke, the brand has reached even the remotest parts of the world. This writer seeks to determine the strategies employed by this soft drink giant to maximize profits in the midst of stiff competition from their rival, Pepsi. The paper will also consider the market structure of the beverage company.

Market Structure

For the purpose of this paper I will analyze Coca-Cola, which operates in an oligopoly. The competitive environment in which a company operates is described by the market structure. In an oligopoly, there are implications for the consumers and competing firms. Thus, the microeconomic concepts of an oligopoly market structure will be analyzed.

The soft drink market can be seen as an oligopoly because only two firms control the vast majority of the market share value – which is Coke and Pepsi. Though other companies are present they do not compete favorably with the ‘big two’ dominant firms. One reason for this dominance is that barriers to entry in the industry are very high. Other factors are production equipment, brand material, and advertising all requires significant financial commitment in the industry. The two dominant companies engage in non-price differentiation. Rarely will you see Coke attempt to undercut Pepsi on price. Instead, you see these companies use creative advertisements to compete (Neary, 2010).

Price relation to elasticity of demand for competing models

Elasticity of demand for a commodity is the rate at which quantity changes as the price changes. Price elasticity is found to be relatively elastic – meaning that a small change in price leads to a big change in quantity demanded.

The soft-drink market is already flooded with substitutes, if a consumer is faced with a dilemma for any reason there is Pepsi, Limca, Mountain Dew etc. to choose from, consumers have a variety of related substitutes to consider.

The time available for consumers to make up their mind in order to shift their taste and preference is always enough. This implies that the elasticity of demand varies with time. The demand for Coke is elastic for middle income earners, who are sensitive to the slightest change in price. An increase in the price of Coke will cause a decrease in the demand for the product by middle income earners.

Coca-Cola is a product considered as a drink for young people. In the long-run, the demand is relatively inelastic because if there is an increase in price consumers will easily shift their preference to a substitute and keep the money in their pocket.