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An Economic Analysis of Brand-Level Strategic Pricing Between Coca-Cola Company and Pepsi

Author

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  • Dhar, Tirtha
  • Chavas, Jean- Paul
  • Cotterill, Ronald W.
  • Gould, Brian W.

Abstract

We investigate market structure and strategic pricing for leading brands sold by Coca-Cola Company and PepsiCo. in the context of a flexible demand specification (i.e., nonlinear AIDS) and structural price equations. Our flexible and generalized approach does not rely upon the often used ad hoc linear approximations to demand and profit-maximizing first-order conditions, andthe assumption of Nash-Bertrand competition. We estimate a conjectural variation model and test for different brand-level pure strategy games. This approach of modeling market competition using the nonlinear Full Information Maximum Likelihood (FIML) estimation method provides insights into the nature of imperfect competition and the extent of market power. We find no support for a Nash-Bertrand or Stackelberg Leadership equilibrium in the brand-level pricing game. Results also provide insights into the unique positioning of PepsiCo.’s Mountain Dew brand.

Suggested Citation

  • Dhar, Tirtha & Chavas, Jean- Paul & Cotterill, Ronald W. & Gould, Brian W., 2005. "An Economic Analysis of Brand-Level Strategic Pricing Between Coca-Cola Company and Pepsi," Working Papers 201538, University of Wisconsin-Madison, Department of Agricultural and Applied Economics, Food System Research Group.
    • Handle: RePEc:ags:uwfswp:201538
    DOI: 10.22004/ag.econ.201538
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    3. Liu, Yizao & Lopez, Rigoberto & Zhu, Chen, 2013. "How Effective is Public Policy in Decreasing Soda Consumption? An Assessment of Four Policy Options," Working Paper series 155328, University of Connecticut, Charles J. Zwick Center for Food and Resource Policy.
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    5. Xun Li & Rigoberto A. Lopez, 2015. "Do Brand Advertising Spillovers Matter?," Agribusiness, John Wiley & Sons, Ltd., vol. 31(2), pages 229-242, April.
    6. Keaton Miller & Boyoung Seo, 2021. "The Effect of Cannabis Legalization on Substance Demand and Tax Revenues," National Tax Journal, University of Chicago Press, vol. 74(1), pages 107-145.
    7. Kai Yin Woo & Shu Kam Lee, 2018. "Price convergence in the UK supermarket chains: Evidence from nonlinear cointegration approach," Economics and Business Letters, Oviedo University Press, vol. 7(3), pages 115-125.
    8. Alberto Salvo, 2009. "Cut‐Throat Fringe Competition In An Emerging Country Market: Tax Evasion Or The Absence Of Market Power?," Journal of Industrial Economics, Wiley Blackwell, vol. 57(4), pages 677-711, December.
    9. Rigoberto A. Lopez & Yizao Liu & Chen Zhu, 2013. "Spillover and Competitive Effects of Advertising in the Carbonated Soft Drink Market," Working Papers 18, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
    10. Horrace, William C. & Huang, Rui & Perloff, Jeffrey M., 2016. "Effects of increased variety on demand, pricing, and welfare," Research in Economics, Elsevier, vol. 70(4), pages 569-587.
    11. Bonnet, Céline & Réquillart, Vincent, 2013. "Tax incidence with strategic firms in the soft drink market," Journal of Public Economics, Elsevier, vol. 106(C), pages 77-88.
    12. Alessandro Bonanno & Carlo Russo & Luisa Menapace, 2018. "Market power and bargaining in agrifood markets: A review of emerging topics and tools," Agribusiness, John Wiley & Sons, Ltd., vol. 34(1), pages 6-23, December.
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