Managerail economics 07/31

Please analyze the following scenario by incorporating your learning and answer the question:

● Coca-Cola and PepsiCo are the leading competitors in the market for cola products. In

1960 Coca-Cola introduced Sprite, which today is among the worldwide leaders in the

lemon-lime soft drink market and ranks in the top 10 among all soft drinks worldwide.

Prior to 1999, PepsiCo did not have a product that competed directly against Sprite and

had to decide whether to introduce such a soft drink. By not introducing a lemon-lime

soft drink, PepsiCo would continue to earn a $200 million profit, and Coca-Cola would

continue to earn a $300 million profit.

● Suppose that by introducing a new lemon-lime soft drink, one of two possible strategies

could be pursued:

○ PepsiCo could trigger a price war with Coca-Cola in both the lemon-lime and cola

markets

o Coca-Cola could acquiesce and each firm maintains its current 50/50 split of the cola

market and split the lemon-lime market 30/70 (PepsiCo/Coca-Cola).

o If PepsiCo introduced a lemon-lime soft drink and a price war resulted, both

companies would earn profits of $100 million. Alternatively, Coca-Cola and PepsiCo

would earn $275 million and $227 million, respectively.

o If PepsiCo introduced a lemon-lime soft drink and Coca-Cola acquiesced, they could

split the markets.

● Please explain, as a manager at PepsiCo,

○ How you can convince your colleagues that introducing the new soft drink is the most

profitable strategy by explaining the reasoning and theoretical analysis