Econ 3551/ L. Kahane
Pepsi & Coke
In May, 1886, Coca Cola was introduced by John Pemberton a pharmacist from Atlanta, Georgia. John Pemberton started brewing his coca cola formula in a three legged brass kettle in his backyard. Pharmacists Caleb Bradham in New Bern, North Carolina first made competitor Pepsi in the 1890’s. The brand was trademarked on June 16, 1903. These companies have brand identification and customer loyalties that have made them a historical landmark. Today Pepsi and Coke control around 90% of the soft drink market, making it one of the most well known oligopolies in the U.S. An oligopoly is a market dominated by so few sellers that an action by any of them will impact both the price of the good and the competitors. Some characteristics of an oligopoly are: * The dominant firms have significant barriers to entry; or exit is difficult. * Access to information is limited
* The dominant firms have significant market power; they set their own price. * The product may be homogenous or differentiated.
* A few large firms dominate the market, i.e. they have a substantial market share. * There is a mutual interdependence among the dominant firms; this means that competition is personal and each firm recognizes that it’s actions affects the rival firms and theirs affects it. Economies of scale deter entry by forcing the entrant to come in at a large scale and risk strong reaction from existing firms or come in at a small scale and accept a cost disadvantage. Barriers to entry are high in the soft drink industry because both soft drink companies and bottlers are factors in entering this market. These two parts of the industry are extremely interdependent, sharing costs in procurement, production, marketing and distribution. Many of their functions overlap; for instance, Pepsi can do some bottling, and bottlers conduct many promotional activities. The industry is already...
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