Activity 3 – CLO 6
Please analyze the following scenario by incorporating your learning from Chapters 9 & 10 of your textbook 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 can 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 (Chapter 10 – Problem13).
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