TABLE OF CONTENTS• Market structure• Oligopoly structure• Kinked demand curve• Introduction of Pepsi• Introduction of Coca-cola• Characteristic of Pepsi & Coca-cola
MARKET STRUCTUREMarket structure – identifies how a marketis made up in terms of:The number of firms in the industry.The nature of the product produced.The degree of monopoly power each firm has.Profit levels.The extent of barriers to entry.Firms’ behaviour – pricing strategies, non-pricecompetition, output levels.
OLIGOPOLY STRUCTURE• "Few" – a "handful" of sellers.• Oligopolies are price setters rather than price takers.• Barriers to entry are high.• Product may be homogeneous or close substitutes.• Interdependent decision making.• There are different models of the oligopoly.
KINKED DEMAND CURVE Developed by Chamberlin to show stickiness of price. The assumption behind is that each oligopolistic will act and react in a way that keeps condition tolerable for all members of the industry. occurs where products are quite similar and, therefore their prices almost same. The oligopoly firm probably realises that it is better to accommodate its rival rather than start a price war.
KINKED DEMAND CURVE (Cont.) The most significant aspect of the solution of an oligopoly situation is the presence of kink in the demand curve of the firm. The kink shows that price reduction by a firm is followed by its rival(competitors). Therefore firm will not move away from the kink.
The Kinked Demand Curve Graph P If P increases, others won’t go • A gap in the MR curve exists along, so D is elastic • A large shift in marginal cost is required before firms will change their priceP MC If P decreases, other firms match the decrease, so D is inelastic MR D Q Q 16-9
PEPSI• Type - Cola• Manufacturer - PepsiCo.• Country of - North Carolina, U.S.A. origin - 1898 (as Brad’s Drink) by• Introduced Caleb Bradham June 16, 1903 (as Pepsi-Cola) 1961 (as Pepsi)• 1931 - entered bankruptcy• 1939 - Company went bankrupt again On three separate occasions between 1922 and 1933, the Coca-Cola Company was offered the opportunity to purchase the Pepsi-Cola company, and it declined on each occasion.
Coca-Cola• Type - Soft drink• Manufacturer - The Coca-Cola Company• Country of origin - United States• Introduced - 1886 by John Pemberton• Color - Caramel E-150d• Flavor - Cola, Cola Cherry, Cola Vanilla, Cola Green Tea, Cola Lemon, Cola Lemon Lime, Cola Lime, Cola Orange and Cola Raspberry. Variants
CHARACTERISTICS Pepsi & Coca-cola• Industry rivalry – Market largely dominated by coca-cola and Pepsi. – Coca cola market share 51% ( April 2008) – Pepsi market share 21% ( April 2008) – The main concentrate producers acts as oligopoly. – Competition occasionally hampers profitability.• Threat of new entrants – Very high barrier to entry. – Big brand names.
• Threat of substitutes – Expanding through alliances, acquisitions and internal product innovation (Pepsi creating orange slice) – Change in consumer tastes and trends is a potential threat.• Bargaining of suppliers – Sugar or syrup could be purchased from many sources on the open market. – Suppliers small and divided. – Bargaining power of suppliers weak.• Bargaining of buyers – Low power since main value added comes from brand name and concentrate formula.
Oligopoly The kinked demand curve - an explanation for price stability? Price The firm therefore, charging demand IfThe principle of is effectively faces Assume the firm to lower its price to of the firm seeks the kinked a price a ‘kinked demand curve’ forcing it to gain a curve rests an output of 100. £5 andcompetitiveon the principle rivals producing advantage, its maintain stable or rigid it makes will followasuit. Any gains pricing will that: If it chose to raise price above £5, its structure. lost and the % change quickly beOligopolistic firms may in rivals would not follow suit andits firm a. If a firm raises its price, the overcome this smaller than the % demand will beby engaging in non- effectively facesnot follow suit rivals will an elastic demand reduction in price – total revenue price competition. curve for its product (consumers would would If a firm lowers its price, its b. again fall as the firm now faces buy from the cheaper rivals). The %£5 a relatively inelastic demand curve. rivals will all do the same change in demand would be greater than the % change in price and TR Total would fall. Revenue B Total Revenue A D = elastic Total Revenue B Kinked D Curve D = Inelastic 100 Quantity
Sustainable Profits??• It should not be a problem to sustain their profits through the next decade. The challenge would be to sustain their historical rate of growth. To do so they need to seek out new markets and increase consumption in currently developing markets such as China and India.