This document analyses an article related to a price war between Coke and Pepsi, The article is analysed by employing various Microeconomics concepts and framework.

1. ARTICLE : -
Pepsi cuts price, Coke yet to follow suit
April 15, 2003 15:03 IST
Heralding the cut-throat summer competition in soft drinks, Pepsi said on Tuesday that it has slashed prices of its 300 ml
returnable glass bottles to Rs 6 in the capital and this price cut may be extended to other markets to make its brands more
affordable.
However, Coca-Cola appears to have been caught on the wrong foot, with its 300 ml pack still priced at Rs 8.
When contacted, Sunil Gupta vice-president (external), of Coca-Cola India, told PTI, "We're making no fresh comments on our
pricing strategy. Right now, our 300 ml pack continues to be priced at Rs 8."
The fresh price war, triggered by Pepsi, follows an earlier onslaught when both the companies reduced prices by about 20 per
cent across the board just before the Union Budget for 2003-04, which provided them excise duty relief.
A Pepsi spokesperson said, "In a high-consumption market like Delhi, aggressive price points devolving from the 300-ml
segment will work much better. Our price strategy for this market, therefore, works off this thinking. As a consequence, 200-ml
bottles are priced at Rs 5. The new price points are 300 ml at Rs 6, and 200 ml at Rs 5."
According to industry sources, this sector is heavily dependent on returnable glass bottles and Pepsi's latest price reduction
strategy is critical to drive volumes.
Sources said earlier this year, Coca-Cola had taken the price war head on by introducing 600-ml PET bottles priced at Rs 12
each, beginning with Maharashtra, one of Pepsi's key markets.
Pepsi, which was selling 500-ml PET bottles priced at Rs 15 each, was caught on the backfoot and was forced to react,
beginning with reduction in prices of its 500 ml bottles to match that of Coke, the sources said.
Meanwhile, action may now shift to the 200-ml segment.
According to industry sources, Coke is offering Sunfill sachets priced at Rs 2 each, free with 200-ml and 300-ml bottles, in
some regional markets. In effect, therefore, while Coke's price points for 200-ml and 300-ml bottles remain at Rs 5 and Rs 8
respectively, the consumer is being offered more for less.
In the home-consumption segment too, Coca-Cola took the lead earlier this year by slashing prices of its 1.5-litre and 2-litre
PET bottles.
Pepsi too reduced prices of its 1.5-litre and 2-litre PET bottles, to Rs 35 and Rs 40 respectively, against the earlier price of Rs
43 and Rs 50.
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Source : - http://www.rediff.com/money/2003/apr/15pepsi.htm

2. ANALYSIS : -
It can be inferred from the above article that Coca-Cola and
Pepsi are perfect substitutes and hence the pricing strategy of
one directly impacts the demand for the other product. Hence,
the indifference curve of Coca-Cola and Pepsi would be a
straight line with equal slopes across all points on the line.
Pepsi slashed the price of its 300ml bottles from Rs.8 to Rs.6,
thus anticipating an increase in the demand and consumption
of its product. The same can be depicted by plotting the price
elasticity of demand for Pepsi. Pepsi reduced its price from
P1(Rs.8) to P2(Rs.6), which would result in an increase in
consumption from Q1 to Q2.
Since, Coca-Cola and Pepsi are perfect substitutes; an
increase in consumption on Pepsi would result in a
proportionate decrease in the consumption of Coca-Cola.
In order to maintain the balance and not loose out on the
market share, Coca-Cola decided to offer Sunfill sachets
priced at Rs2. for free along with the 300ml bottle,
thereby increasing the Marginal Utility of its product.
This would also result in an increase in the consumption
of Coca-Cola. Thus, as Coca-Cola’s Marginal Utility
moved from MU1 to MU2, due to the value addition, so
would the Quantity move from Q1 to Q2.
However, since Pepsi reduced the price of its 300ml bottle,
it resulted in the movement of the budget line, due to
which more customers will be prompted to consume Pepsi
instead of Coca-Cola. As depicted in the adjoining figure,
since the price of Pepsi reduced, the Budget Line of Pepsi
and Coca-Cola, moved from B1 to B2. This resulted in a
further increase in the consumption of Pepsi from P1 to
P2. Hence, it can be concluded that the best way for Coca-
Cola to counter this would be by reducing the price of its
300ml bottle to match it to that of Pepsi’s. This would be
needed since Pepsi and Coca-Cola are perfect substitutes.