Imagine you are a manager at PepsiCo with the following scenario assumptions, 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? 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, less than Coca-Cola’s profit of $300 million. 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 would maintain its current 50/50 split of the cola market, while splitting 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.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Imagine you are a manager at PepsiCo with the following scenario assumptions, 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?

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, less than Coca-Cola’s profit of $300 million.
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 would maintain its current 50/50 split of the cola market, while splitting 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.

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