Oligopoly is defined as an industry in which there are a few firms. By a few it is meant that the number of firms should be sufficiently small for there to be conscious interdependence, with each firm aware that its future prospects depend not only on its own policies, but also those of its rivals. Firms in oligopoly can use either high-price strategy or low-price strategy to maximize their profit. An industry is defined as a group of firms where the firms products are close substitutes for one another, that is have a high and positive cross elasticity of demand.
Coca cola and Pepsi are one of the leading competitors in an oligopoly market .But in Sri Lanka in addition to those two companies elephant house’s Kiik cola too plays a major role in production of cola beverages.
They sell the homogeneous product so they can control over price but they will consider their action when they would like to change the price of their goods. ‘Homogeneous goods’ are goods which either physically identical or are viewed as identical in the eyes of the customers are known as Homogeneous goods. Since the customer can’t differentiate one product from the other it becomes very difficult for a seller to compete on the benefits. The homogeneous goods are perfect substitutes for each other and are generally sold in perfect competition. The seller competes on either price or availability. In perfect competition many buyers and many sellers are present so the profit margins are very less. Price is the most important factor along which the firms producing homogeneous goods compete. For homogeneous goods the process costing is an allocation system companies use to allocate cost. It is easier to use and flexible as it is based on process.
For example in commodities market vegetables, fruits, grains, oil, metals and energy goods are homogeneous goods. The buyers purchase doesn’t depend much upon the product as all are similar but more on the price. So if you are going to purchase 1kg of tomato than wherever you may buy it from, it will serve the same purpose.
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So in this instance they usually change the price of their goods according to kinked demand curve. They are using cut-throat competition to attract more potential customer.
Normally, these three firms will use low-price strategy at the same time to maximize the market profits. Especially when summer holidays arrive, both of the firms will use cut-throat price competition to increase their sales so as to increase their profit. Game theory is applied to be a market share. A game theory is a pricing policy and it helps a firm to enhance profit. The best example that we can take is what happened in 2013. According to the article, Coke-Cola decided to cut it’s prices of the 200ml bottle from Rs.10 to Rs.8. This reduction in price would affect their sales tremendously as this segment mostly caters to the rural areas (as mentioned in the article) where people have a lower disposable income, hence making it an extremely price elastic segment. Suggesting that a change in price can lead to a significantly larger change in quantity demanded. A rise in demand can help Coke achieve large-scale production and consequently lower average total costs in the long run due to benefits of economies of scale.
In 2013 Coke-Cola introduced it`s affordable pricing strategy in which it drastically reduced its prices to Rs.5. Pepsi was forced to follow as it would lose a massive portion of the market share, being a close substitute. But these two firms couldn`t sustain the market at such low prices and both withdrew from this lower pricing strategy. Since then (for 5 years) the prices have remained stable at Rs.10. Price rigidity in oligopolistic firms can be explained through the The Kinked Demand Curve model.The kinked demand curve represents how the pricing behavior for each firm is strategic.
Firms in this market structure majorly resort to non-price competitive measures as their marginal costs can fluctuate and still result in the same market price. The marginal cost of production depends on the amount of money firms allocate to research & development and advertising. This is done in an effort to differentiate the goods and minimize the cross-price elasticity of demand as much as possible. Coke has reduced its price and this would lead to an expansion in it’s demand in the short term, as currently it is cheaper than Pepsi in this segment. This would lead to an increase in Coke’s market share. The longer Pepsi allows Coke to have an edge over itself in terms of market price the more consumers it would lose in the long term. This may be because consumers who shift from Pepsi to Coke due to lower prices, might develop a taste for the latter product and even if Pepsi decides to reduce it’s price the consumers it lost in the initial case might not shift back.
Rival firm PepsiCo may be compelled to reduce its price to a minimum of Rs. 8 in order to maintain its market share. Changing the price is one of the last measures firms resort to as it can lead to harmful repercussions for all the firms in the industry, such as price wars. Which is when companies continuously reduce their prices to destabilize their competition.
A reduction in market price in an oligopolistic market structure is always beneficial for the consumers as it provides them with a variety of cheaper close substitutes. The only stakeholder with a negative impact would be the firms, as lower prices would mean a lower margin of profitability. The role of non-price competition is essential in this case as it can provide consumers with information about alternate products. Also advertising can increase competition between firms and contribute in decreasing their monopoly power. Although there are some drawbacks for advertising such as it increases the cost of production thus resulting in higher prices for consumers. It creates needs that consumers would not otherwise have, resulting in a waste of resources. Successful advertising can lead to increase in monopoly power of a firm.
There are high barriers to enter this market. Coca cola and Pepsi have signed a cartel contract. The two firms will become a cartel to avoid other firm to enter this market because it will decrease their economic profit. Cartel is a small number of firms acting together to limit cost, raise price and increase profit. Neither coca cola nor Pepsi or elephant house exit from this market, another firm will become a monopoly. The soft drink price will become higher.
