Activity 5 Explain how beliefs and strategic interaction shape optimal

Activity 5

Explain how beliefs and strategic interaction shape optimal decisions in oligopoly environments.

Please analyze the following scenario 

Coca-Cola and PepsiCo are the leading competitors in the market for cola products. In 1960 Coca-Cola introduced Sprite, which today is among the worldwide leaders in the lemon-lime soft drink market and ranks in the top 10 among all soft drinks worldwide. Prior to 1999, PepsiCo did not have a product that competed directly against Sprite and had to decide whether to introduce such a soft drink. By not introducing a lemon-lime soft drink, PepsiCo would continue to earn a $200 million profit, and Coca-Cola would continue to earn a $300 million profit. 

  • Suppose that by introducing a new lemon-lime soft drink, one of two possible strategies could be pursued:
    • PepsiCo could trigger a price war with Coca-Cola in both the lemon-lime and cola markets  
  • Coca-Cola could acquiesce and each firm maintains its current 50/50 split of the cola market and split the lemon-lime market 30/70 (PepsiCo/Coca-Cola). 
  • If PepsiCo introduced a lemon-lime soft drink and a price war resulted, both companies would earn profits of $100 million. Alternatively, Coca-Cola and PepsiCo would earn $275 million and $227 million, respectively.
  • If PepsiCo introduced a lemon-lime soft drink and Coca-Cola acquiesced, they could split the markets.
  • Please explain, as a manager at PepsiCo, 
  • If you were a manager at PepsiCo, would you try to convince your colleagues that introducing the new soft drink is the most profitable strategy by explaining the reasoning and theoretical analysis? Why or why not?
 

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