Brooke Dodson Word Count: 500 Cola Wars Continue: Coke and Pepsi in 2006 Case Analysis 1.

Why, historically, has the soft drink industry been so profitable? Revenues are extremely concentrated in this industry, with Coke and Pepsi, together with their associated bottlers, commanding 73% of the case market in 1994. The two major players, have primarily competed on the basis of advertising and promotion, rather than price, enabling them to maintain profitability in the industry. Entry for new competitors is difficult because bottling operations have a fairly high minimum efficient scale, requiring fixed assets specific to the process and packaging. Additionally, suppliers and buyers have been controlled by the industry. Suppliers to the soft drink industry are, for the most part, providing commodity products. The inputs are fairly homogeneous goods, enabling the two competitors to simply choose the least costly source. Buyers can be considered at the consumer or the retail level. Consumers have historically been brand-loyal and not based purchase decisions on price. For these consumers, taste generally dictates preference. Thus, though they incur no monetary switching cost, they may experience a loss of enjoyment associated with switching to their less-preferred brand. Retail buyers have significant costs for switching from the major brands, since such a move could result in a loss of these brand-loyal consumers. Additionally, substitutes for soft drinks have not historically been close enough to take away significant market share. However, the emergence of new substitutes may impact an already flattening level of demand, which could negatively impact the industrys profitability.

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Brooke Dodson Word Count: 500 2. Compare the economics of the concentrate business to that of the bottling business. Why is the profitability so different? There are many bottlers and few concentrate producers, and the function of the bottler can be easily imitated while the concentrates for Coke and Pepsi are unique. Thus, the concentrate producers are in the most advantageous position. Their suppliers are the powerless commodity producers. Thus, they enjoy protection from the barriers to entry, and they are not subject to the asset specificity and exit costs experienced by the bottlers. The concentrate producers have monopoly power over their brand, while the bottlers are essentially providing a commodity service. Additionally, the territorial limits imposed by the major concentrate producers further discourage bottlers from switching brands. The value added by the bottler is much less than that of the concentrate producer and this difference results in the different profits each player is able to capture.

3. How has the competition between Coke and Pepsi affected the industrys profits? Although the competition between Coke and Pepsi has seemed intense, it has not eroded the profitability of the industry because of its concentration and the fact that their competition has centered on marketing strategy. Price, and thus industry-wide profit, has remained stable, as has strong demand. They have also balanced each others strategies, especially on the international level, entering markets where the other had not yet established a competitive disadvantage. The companies relative market shares have varied, but overall market profitability has remained relatively stable.