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Coca-Cola and Pepsi Co are the leading competitors in the market for cola products. In 1960 Coca Cola introduced Sprite, which today is the worldwide leader in the lemon-lime soft drink market and ranks 4th 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 ear a $300 million profit. Suppose that by introducing a new lemon lime soft drink, one of the two possible strategies could be pursued: 1) PepsiCo could trigger a price war with Coca-Cola in both the lemon-lime and cola markets, or 2) Coca-Cola could acquiesce and each firm maintain its current 50/50 split of the cola market and split the lemon lime market 30/70 (PepsiCo / Coca Cola). If PepsiCo introduced a lemon-lime soft drink and a price ware resulted, both companies would earn profits of $100 million. Alternatively, Coca Cola and Pepsi Co would earn $275million and $227 million, respectively, if PepsiCo introduced a lemon lime soft drink and Coca Cola acquiesced and split the markets as listed above. If you were a manager at Pepsi Co, would you try to convince your colleagues that introducing the new soft drink is the most profitable strategy? Why or Why not?

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M974266

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