ECO

“The Soft Drink & Bottled Water Manufacturing industry produces bottled, tinned and canned beverages for human consumption. This industry consists of firms engaged in one or more of the following activities: manufacturing carbonated soft drinks; purifying and bottling water; and manufacturing other beverages, such as energy, sports and juice drinks” (www.ibisworld.com). Approximately 34% of industry production belongs to North America. The two leading companies in the industry, The Coca-Cola Company and PepsiCo, are headquartered in the United States.

The fact that Coca-Cola and PepsiCo acquired their largest bottlers allowed for the assumption that the trend in the soft drink industry is toward vertical integration. A vertical integration is “a merger between two companies producing different goods or services for one specific finished product” (www.mbda.gov). Commonly, vertical integrations involve the relationship between buyers and sellers. Vertical mergers intend to reduce overall costs and improve efficiency. For instance, when in 2010 PepsiCo acquired The Pepsi Bottling Group, Inc. and PepsiAmericas, Inc., PepsiCo eliminated the costs of finding suppliers, negotiating deals and paying full market prices. In addition, the production and supply operations between Pepsi and the bottlers have been synchronized and allowed timely supply cycles. Moreover, the integration allowed for greater pricing flexibility.

As soft drink industry operates in oligopoly, with only a few companies dominating the market, it makes it difficult and too costly for new companies to enter this market due to the barriers to entry. The barriers to enter could include limit pricing, high costs of advertising, strong brands, consumer loyalty, or exclusive patents and contracts. However, a vertical merger for the integrated companies in soft drink industry allowed for overall costs reduction and efficiency. Consequently, the profitability of the companies involved in the merger is positive and significant.

Globalization – “the increasing integration of economies, cultures, and institutions across the world” (Colander, 2013) – opened opportunities for the companies to produce and sell at a global level. Rewards for winning globally, however, could be compromised by higher competition. Yet, according to IBIS World Industry Report of 2013, despite rising costs of the main ingredients and growing health concerns, “strong brand loyalty to the leading soda brands has allowed major producers to maintain growth by charging higher prices for these products” (www.big.assets.huffingtonpost.com). These costs have been considerably recovered with the acquisition of independent bottlers by Coca-Cola and Pepsi. The report also predicts intense competition in the industry, which might result in even further industry consolidation. The expectation is that dominating companies will run efficiently and operate at the cost-saving mode, which “will allow producers to lower the prices they charge downstream markets” (www.big.assets.huffingtonpost.com) and keep the profit steady.

Current and expected government policies and regulations, including taxes and regulations in place to address issues related to externalities

Externalities pose fundamental economic policy problems when individuals, households, and firms do not internalize the indirect costs of or the benefits from their economic transactions. The resulting wedges between social and private costs or returns lead to inefficient market outcomes. Economists recommended government intervention to correct for the effects of externalities

Current and expected government policies and regulations that maybe a major concerns in the soft drink industry is the recent trend to impose taxes as a policy to change behavior and rein in the growing obese population in the U.S.29 A SSB tax is aimed at changing the price of unhealthy, energy-dense drinks in an effort to shift consumption patterns toward a healthier diet. ( Helbling, 2012)

Excise taxes may be imposed on the soft drink industry, excise taxes are different from other taxes in that they have two goals: raise revenue and discourage consumption.

Economists and policymakers sometimes support governmental intervention to correct for externality problems, but in the case of soda and candy taxation, the logic is flimsy. According to proponents of taxes on soda and candy, obese people create a negative externality because they get sick more often. That obesity and overweight problems account for 9.1 percent of all health care costs in the U.S. the exact impacts of excise taxation on individual behavior are still debated. Brownell's article uses elasticity analysis to claim that a one-cent-per-ounce tax on sodas will increase the price of soda by 15 to 20 percent, and with a 25 percent "substitution effect," that will equal a 10 percent decrease in total caloric consumption.

It may even seems entirely plausible that a new type of drink could emerge from manipulation of soda prices. Under a new tax regime, we might see soda manufacturers advertise their brand as the highest in caffeine or sugar, in a sort of "more bang for your buck" approach. It seems equally likely that servings would get smaller and more concentrated to avoid taxation on a per-ounce basis. ( Scott Drenkard, 2011)

However the positive externalities, and here the issue is the difference between private and social gains, would be research and development (R&D) activities are widely considered to have positive effects beyond those enjoyed by the producer. The soft drink industry continue to fund and research new products or health alternatives that are low in sugar and sodium. ( Helbling, 2012)

Further, taxes like this tend to have unintended consequences. Detailed economic analysis shows that when the consumption of soda is discouraged with higher prices, children and adolescents tend to substitute other food or drink to make up for lost calories. Taxes on soda could even because an increase in caloric consumption, as other substitutes can have higher calorie contents than soda.

The impact the soft drink industry will have on environmental and or natural resources “Impact” meaning the effect caused by a proposed activity on the environment including human health and safety, flora, fauna, soil, air, water, climate, landscape and historical monuments or other physical structures or the interaction among these factors; it also includes effects on cultural heritage or socio-economic conditions resulting from alterations to those,. (Haley, 2001)

Federal Trade Commission, Protecting America's Consumers. (2015). Competitive effects. Retrieved from http://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/mergers/competitive-effects

IBIS World. (2015). Global Soft Drink & Bottled Water Manufacturing: Market Research Report. Retrieved from http://www.ibisworld.com/industry/global/global-soft-drink-bottled-water-manufacturing.html

IBIS World. (2013, November). IBIS world industry Report 31211a: Soda production in the US. Retrieved from http://http://big.assets.huffingtonpost.com/soda.pdf