Introduction to Managerial Economics
5 1 What is Managerial Economics?
Coca Cola and PepsiCo are the world’s two pre-eminent soft-drink manufacturers. Coca Cola and Pepsi manufacture only concentrate, which they ship to networks of regional bottlers distributed throughout the United States and elsewhere in the world. The bottlers mix the concentrate with sweetener and water to produce the final product, which then is distributed to retailers, food service providers, restaurants, and other customers.1 Early in 1999, Pepsi spun off its American bottling operations as an independent company, the Pepsi Bottling Group. In this regard, Pepsi followed Coke, which had long been separate from its American bottlers. Coke’s largest bottlers were Coca Cola Enterprises and the Coca Cola Bottling Company. In early November 1999, following three years of vigorous competition for market share, Coca Cola announced that it would increase its price for concentrate to 7%. Later the same month, Pepsi made a similar announcement. Both Coke and Pepsi emphasized that they would step up expenditure on advertising and other marketing support in conjunction with the price increases. Industry analysts predicted that the 7% increase in the price of concentrate would result in the $1.99 retail price of a 12-pack rising to $2.49 or higher. By contrast, the Pepsi Bottling Group estimated that the retail price would rise by 1 cent per can. The price increases were welcomed by Beverage Digest Editor, John Sicher, who remarked: “At this point, both systems need to improve margins and improve the overall profitability of the category.” Other analysts, however, questioned the extent to which retail demand would fall as a result of the price increase. Sanford C. Bernstein analyst Bill Pecoriello concluded: “It’s positive for the industry, but it’s not without risk.”
1 The following discussion is based, in part, on Standard & Poor’s Industry Surveys: Foods & Nonalcoholic...