ANALYSIS : -
It can be inferred from the above article that Coca-Cola and
Pepsi are perfect substitutes and hence the pricing strategy of
one directly impacts the demand for the other product. Hence,
the indifference curve of Coca-Cola and Pepsi would be a
straight line with equal slopes across all points on the line.
Pepsi slashed the price of its 300ml bottles from Rs.8 to Rs.6,
thus anticipating an increase in the demand and consumption
of its product. The same can be depicted by plotting the price
elasticity of demand for Pepsi. Pepsi reduced its price from
P1(Rs.8) to P2(Rs.6), which would result in an increase in
consumption from Q1 to Q2.
Since, Coca-Cola and Pepsi are perfect substitutes; an
increase in consumption on Pepsi would result in a
proportionate decrease in the consumption of Coca-Cola.
In order to maintain the balance and not loose out on the
market share, Coca-Cola decided to offer Sunfill sachets
priced at Rs2. for free along with the 300ml bottle,
thereby increasing the Marginal Utility of its product.
This would also result in an increase in the consumption
of Coca-Cola. Thus, as Coca-Cola’s Marginal Utility
moved from MU1 to MU2, due to the value addition, so
would the Quantity move from Q1 to Q2.
However, since Pepsi reduced the price of its 300ml bottle,
it resulted in the movement of the budget line, due to
which more customers will be prompted to consume Pepsi
instead of Coca-Cola. As depicted in the adjoining figure,
since the price of Pepsi reduced, the Budget Line of Pepsi
and Coca-Cola, moved from B1 to B2. This resulted in a
further increase in the consumption of Pepsi from P1 to
P2. Hence, it can be concluded that the best way for Coca-
Cola to counter this would be by reducing the price of its
300ml bottle to match it to that of Pepsi’s. This would be
needed since Pepsi and Coca-Cola are perfect substitutes.