Game Theory: The Oligopoly of Coca-Cola and PepsiCo

Coca-Cola was introduced in 1886 by Dr. John Stith Pemberton in Atlanta, Georgia. Originally marketed as a medicinal tonic, it laid the foundation for the carbonated soft drink industry. Pepsi-Cola emerged in 1898, created by Caleb Bradham in North Carolina, positioning itself as a direct competitor. This rivalry, famously termed the "Cola Wars," has been a defining aspect of their histories.

Defining Oligopoly

An oligopoly is a market structure in which a few large firms dominate the industry, each with a high degree of market power. The firm’s decisions are interdependent, meaning that the actions of one firm directly influence the strategies and outcomes of its competitors. Game theory, a mathematical framework for analyzing strategic interactions among rational players, is particularly useful in understanding the dynamics within an oligopoly.

The Prisoner's Dilemma in Oligopolistic Competition

A classic example in game theory is the Prisoner's Dilemma, which illustrates why two rational individuals might not cooperate, even when it appears to be in their best interest. In the context of oligopolies like Coca-Cola and PepsiCo, this dilemma manifests in their strategic decisions regarding pricing, advertising, and product launches.​ Consider a simplified scenario where both companies must decide whether to engage in aggressive price changes:​

• Firm A does not lower, Firm B lowers: Firm A is worse off as it can only gain $30 million while Firm B can gain $100 million. 

• Both Lower: Both firms gain the same amount of profit ($70 million).

• Both Raise: Both firms gain the same amount of profit, but relatively more than if both lowered ($80 million)

Therefore, the dominant strategy for Firm A is to lower the price. By the same token, Firm B’s dominant strategy is also to decrease prices to gain the highest outcome. Therefore, the optimal collective outcome (both not raising price) is undermined by the incentive for individual firms to deviate and lower price, fearing the loss of market share and profit if the competitor violates the mutual agreement (collusion).

Nash equilibrium: The Trap of Self-Interest

Nash equilibrium is a concept of game theory that describes a situation where no firm has an incentive to change its strategy after considering the opponent's decision. In an oligopoly, each firm seeks to maximize its own profit while anticipating its rival’s actions, despite cooperation (e.g., both raising prices) could lead to higher profits for both in consideration of collective firm benefit.

Non-Price Competition

Direct price competition often results in a lose-lose situation, as both firms may lower prices, diminishing profit margins without significantly altering market shares. Recognizing this, Coca-Cola and PepsiCo typically avoid price wars, instead focusing on non-price competitive strategies.​

To differentiate themselves, both companies invest heavily in marketing, brand building, and product innovation. For instance, recognizing shifts in consumer preferences, both companies have expanded their product lines beyond traditional sodas. Coca-Cola's portfolio includes brands like Diet Coke, Coca-Cola Zero Sugar, Sprite, Fanta, Dasani, and Powerade. PepsiCo offers products such as Diet Pepsi, Pepsi Zero Sugar, Mountain Dew, 7UP (marketed by Pepsi outside the U.S.), and has invested in health-oriented beverages like Celsius. This diversification addresses the growing demand for healthier options and reduces reliance on carbonated beverages.

Reference List

Business-Essay.com. (2015). Oligopoly Economics: Coca-Cola & Pepsi Competition Essay Example [Free]. [online] Available at: https://business-essay.com/oligopoly-economics-coca-cola-and-amp-pepsi-competition/ [Accessed 28 Mar. 2025].

‌Quartr.com. (2025). The Coca-Cola and Pepsi Duopoly: The Secret Ingredients. [online] Available at: https://quartr.com/insights/company-research/the-coca-cola-and-pepsi-duopoly-the-secret-ingredients [Accessed 28 Mar. 2025].

‌Tutorhunt.com. (2025). Oligopolistic Competition Between Pepsi And Coca-cola - Economics Resource. [online] Available at: https://www.tutorhunt.com/resource/8374/ [Accessed 28 Mar. 2025].

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