Coke/Pepsi Economic Case Study

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1. Why is the soft drink industry (i.e., the cola concentrate industry) so profitable?

The soft drink industry survives on the rivalry that has existed for over a century between Coca-Cola and Pepsi-Cola. The two brands are competing for the market share nationally and globally by trying to clinch the thirst of every person in the world. In Michael Porter’s five forces, the threat of rivalry pushes both companies to “out compete” with each other and drive up the fixed cost to enter the market. By driving up the fixed costs for other new entrants, the profits stay with them and future competitors become more hesitant to enter the carbonated soft drink market. Porter’s force of buyer power explains that brand identity will help create a sizeable profit and reduce competition in the industry. Coke and Pepsi both use recognizable figures (celebrities) to advertise their cola concentrate product and help demolish new entrants from entering the industry. Supermarket chains continue to be one of the biggest buyers in the cola concentrate industry. Supermarkets have realized that the recognizable brand names of Coke and Pepsi are helping them to generate higher revenue for the store. When supermarkets are generating high profits form the two major cola industry producers, Coke and Pepsi, they are more hesitant to take a risk on the smaller, less “branded” cola names. By having this domino effect happen, Coke and Pepsi become more profitable and live the competition in the dust. Coke and Pepsi have used their brand identity to increase their profitability in the fountain drink area of the cola industry. By supplying the cola to the most popular fast food chains in the country (McDonald’s, Burger King, Taco Bell, etc.) they have taken their profits to a whole new level and taken the competition out of the market. The market share and profits are in their control. 2. How has the competition between Coke and Pepsi affected their profits? By the start of...
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