The Coke Pepsi Rivalry in Indian markets

Presented by:
Milana Borisev

April 9, 2007.

Abstract

This paper details duopoly market fights between two rivals in Indian market and the
various ways of conflict resolution. Cola giants, Coke and Pepsi, entered the Indian
market and while they were entering they brought with them cola wars which become
long time ago the global issue. This case also constructs the new model, using Bertrand’s
duopoly model, to identify the price level that each firm is willing to sell for in ignorance
of other’s firm actions.
 1. Introduction of the Topic

- The war between two largest soft drink industries had become part of the global

folklore back in 1938. Over a hundred years of the war, between Coke and Pepsi, had

changed many things not just in their ways of conducting business but also in minds of

consumers. In the beginning, war between Coke and Pepsi was considered such a normal

thing because in the nation such as America, rivalries were part of its democratic

tradition. While time was passing war between those two rivals became very unhealthy.

One example of these unhealthy levels was Coke’s destructive price war practices in the

early 1980s.1

- In the early 1970s Coke and Pepsi started offering same product with the same look

and taste. However, both of the bottling companies kept rejuvenating the market through

different promotion practices, price diversification and product modifications. Each of the

companies was under pressure to introduce something more and different form the other

product in order to maintain or gain competitive advantage. The only way those two

rivals could control the market is to explore and implement new tactics to generate

consumer interest. Each of the companies would do anything to generate public interest.

On of the ways that coke decides to go in order to gain competitive advantage was to

enter the Indian market. 2

- Coke had entered the Indian market back in 1970s. The soft drink market was

controlled by Coke since the 1977 when it had to exit the country following policy

changes regarding Multi National Corporations operating in India. From the 1994 to1998

Pepsi controlled the largest percentage of soft drinks market in India. During the 1994 to

1
Management review , January 1985,: “Thoughts from the front”
2
ICFAI Center for Management Research , 2001:” Pepsi vs. Coke”
1998 period Indian market was the only market where Pepsi had control over the market

and not the Coke. While Pepsi controlled the market they did not really pushed hard to

expand their capital and to gain customers trust because they had monopoly for that time.

In 1998, after four years of break Coke wants to re-enter the market and that’s the point

when the war between two markets in India starts. One of the latest rounds of disputes

between Coke and Pepsi has Pepsi dragging Coke to the court and accusing it of unfair

practices that are conducted in order to regain its advantage that it has lost in past four

years. Also one other thing that Pepsi is accusing Coke for is that it is trying to steal their

workers by overpaying any worker that decides to move to work for Coke instead of

Pepsi. Coke has been accused of taking three of Pepsi’s key sales personnel and offering

them almost as five times much as Pepsi pays them. On the other side, Coke is saying

that they did not take over Pepsi’s workers, they just offered them what they asked for. 3

Going even further in to the battle and the advertising war between Coke and Pepsi the

end result is that the two companies had restricted themselves to pitched battles in the

marketplace , which was beginning to peak with the over the top advertising battle.4 The

bottom line of this advertising battle is that both companies are just trying to increase

their permanent sales, by doing anything that is necessary in order to defeat its

competitor, without really trying to concentrate on the important factors that could ensure

their long-term gain. This short term goals, which involve unhealthy levels of business

conduction, could hurt both of the companies by losing its share of Indian market and

also customers trust.

3
India Today , May 4,1998: Cola Quarrels” , pages 1-3
4
India Today , May 4,1998: Cola Quarrels” , pages 1-3
 2. Bertrand’s model of duopoly

- Bertrand’s duopoly model is describing the competition in duopolistic market in

terms of price, in which competitors are selling identical product, and each are assumed

to select a price level in ignorance of other action. It is a game in strategic form and

solution suggests a non cooperative equilibrium. Each of the firms in Bertrand’s model

chose a price, and produces enough output to meet the demand it faces, given the prices

chosen by all the firms.5

- The Economic setting for the Bertrand’s model is assuming that the single good is

produced by n-firms and each of the firms can produce q units of good at a cost of C.

Also normal demand function D is used to specify the demand for the product. The

interpretation of D is that if the good is available at the price p, then the total amount

demanded is D (p). Bertrand’s model also assume that if the firms set different prices ,

then all consumers purchase the good from the firm that sells for the lowest price, which

also produces enough output to meet the demand. In the case where more than one firm

sets the lowest price, than those firms that did so will share their demand at equal price.

On the other hand, a firm whose price is not the lowest price receives no demand and

produces no output. Each of the firms will produce that much output just enough to

satisfy the demand.

Set up for the Bertrand’s duopoly strategic game:

- Players: Two firms

- Actions: Each firm’s set of actions is the set of possible prices

- Preferences: Each firm’s preferences are set by its profit.

5
Martin J.Osborne, 2004: “An Introduction to game theory” ; Chapter 3, pages 63-65
 3. Model construction

- As I mentioned in first section, Coke and Pepsi rivalry in Indian market is very

important for each of the companies and both of them would do what ever it takes to gain

competitive advantage and control over the marketplace. I will also use Bertrand’s model

of duopoly as a tool to explain the decision making and competition in terms of prices,

and possible conflict resolution between Coke and Pepsi in Indian market.

1. Players: Coke and Pepsi

2. Actions: Each firm set of action is set of possible prices p1-Coke and p2- Pepsi

3. Preferences: Each firm wants to maximizes its profits

- We assume that in this strategic game there is no cooperation between Coke and

Pepsi in terms of the price. Each of the firms will set its own price, without knowing in

advance what other firm will do. Both, Coke and Pepsi are aware that in order to obtain

all the profits it has to set lower price, for the bottle of drink, than its competitor. Also,

neither Coke nor Pepsi will set the price of one bottle that is lower that its production cost

of that bottle. Even if Coke and Pepsi set their beverages under a different name, all of

the costumers in India know that the product that they sell is exactly the same.

Both Pepsi and Coke know from the experience that the demand for their beverages is,

P= a – Q (Q=a-P) and TC=CQ,

where P is the price of bottle of the beverage, and Q (Q=q1+q2) is overall quantity of

coke and Pepsi beverages sold by two firms, and a is a constant. TC is assumption that

we deal with constant cost industriers C.

  We will assume that the cost of producing one bottle for Indian market is 50

cents, for both Coke and Pepsi.

 As I mentioned both firms are profits maximizing firms.

 If p=c firm makes no profit

 Because the cost of producing each unit is same, equal to c, firm Y (Coke) makes

the profits p1-c and firm two X, Pepsi, makes the profits equal to p2-c.

Profits = Revenue-Cost

Π= p*q-cq and p=0 if p<c6

Π= ( p1-c) (a-p1 ) for Coke and Π= ( p2-c) (a-p2) for Pepsi)

Profits:

1) If Coke charges $1 for bottles of coke and Pepsi charges $2 for bottle of Pepsi then

Coke takes all profit which is $1.50 per bottle:

If p1<p2 then ΠX= ( p1-c) (a-p1)

(If instead Coke (X), Pepsi (Y) charged lower price per bottle than Pepsi would obtain all

profit and would get nothing)

2) If Coke charges same price as Pepsi for one bottle of drink, lets say $1, then they

would share profit. Coke would make 50 cent per bottle so would Pepsi

If p1=p2 then ΠX=1/2 ( p1-c) (a-p1)

6
Martin J.Osborne, 2004: “An Introduction to game theory” ; Chapter 3, pages 66
3) If Coke in this case decides to charge $2 per bottle of drink and Pepsi charges $1 per

bottle of drink then Coke would not make any profit:

If p1>p2 then ΠX=0

(If instead Pepsi is the company that decides to charge $2 per bottle of drink and Coke $1

than Pepsi would not make any profit)

- From the previous example we could see that the firm which charges the lower price

will obtain all profit, and other firm which charges higher prices per bottle of drink will

get BIG FAT ZERO. Now we have seen what the profits of each firm are, but in order to

find Nash equilibrium, first we need to find firms best response function given what other

company does.

Best response function:

1) If Pepsi charges $1 per bottle of drink and Coke knows that, then Coke would

charge 80 cents per bottle of drink because it still makes a profit

Bx (py) = p1<p2 if p2>c

- Same best response function would be for Pepsi if it new that Coke would charge

$1 per bottle of drink, then it would charge 80 cents per bottle. Now Pepsi’s best response

function given what Coke is doing is:

By (px) = p2<p1 if p1>c

2) If in this case Coke new that Pepsi would set its price to be 50 cents which is equal

to cost, then only thing that Coke would do is to set the same price of 50 cents per bottle
 Bx (py) = p1=p2 if p2=c

- Same response would be for Pepsi if it new that Coke would charge the price of 50

cents per bottle. Only price that Pepsi could charge if it wants to stay in business is 50

cents. So in this case Pepsi’s best response function is follow:

By (px) = p2=p1 if p1=c

Now we can see that at the end both Pepsi and Coke we be lowering their prices in order

to get all profits but at the end their price would be equal to cost p1=p2=c. If they

cooperated they could set the monopoly price where both of the companies could make

higher profits, but from their incentives to cheat that could never happened.

4. Conclusion

- Bottom line for this paper is that this long term war between Coke and Pepsi in

India would probably last forever because both of the companies are only concerned

about the profits and how they will benefit more and more. Most of the concerns that

different experts have is that how long they will survive using that strategy and at the end

who will benefit and who will lose.

- Also from the Bertrand’s model we could see that if we assume that two companies

do not cooperate, due to their incentives to cheat, at the end they will both be worst of

then if they cooperated. Both of the companies decide to charge its own price for the

bottle of drink, which would be at the lower price than its competitors charge and at the
higher price than production cost of one bottle, which at the end would lead to the price

that is equal to the production cost.

- In August 2004, Coke and Pepsi had decided to join their hands together and to raise

the prices of soft drinks. Both of the companies stated that the reason for doing such a

thing is that the too low prices were for them lose-lose situation. Both of the companies

were experiencing very high sales in Indian market, but in order for them to increase their

profits they needed to increase their prices. As of August 2004, price of 200ml pack and

300ml pack increased by Re1 while larger bottles are more expensive by 10-12 per cent.

Even with the increase in the prices of Pepsi and Coke, consumption of those two

products remained same. Also, this pricing action was aggressively supported by strong

advertising to expand the consumer base from 160 million consumers in 2002 to 250

million consumers in 2004. 7

7
Mohini Bhatnagar, 24 August 2004:”Pepsi, Coke join hands to raise prices”.
References:

1. Management review, January 1985,: “Thoughts from the front”

2. ICFAI Center for Management Research , 2001:” Pepsi vs. Coke”

3. India Today , May 4,1998: “Cola Quarrels”

4. Martin J.Osborne, 2004: “An Introduction to game theory” ; Chapter 3

5. Mohini Bhatnagar, 24 August 2004:”Pepsi, Coke join hands to raise prices”.