Coca-Cola and PepsiCo are the leading competitors in the market for cola products. In 1960 Coca-Cola introduced Sprite, which today is the worldwide leader in the lemon-lime soft drink market and ranks fourth 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:
(1) PepsiCo could trigger a price war with Coca-Cola in both the lemon-lime and cola markets, or (2) Coca-Cola could acquiesce and each firm maintain its current 50/50 split of the cola market and split the lemon-lime market 30/70 (Pepsi Co/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 and split the markets as listed above.
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? Why or why not?
The solution provides a detailed explanation examining the situation and determining if a manager should try to convince your colleagues that introducing the new soft drink is the most profitable strategy.