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SEMESTER I, ACADEMIC SESSION 2023/2024 (A231)

SMG1013 MICROECONOMICS

TITLE:
OLIGOPOLY (COCA-COLA)

LECTURER:

DR. ASMAH BINTI MOHD JAAPAR

GROUP: KSB

STUDENT NAME:

NAME Matric No
ASYFA NAJWA BINTI MD TARMIZI 1232659

HANI NUR INSYIRAH BINTI RASMAN 1232665

SITI NUR AMIRAH BINTI ARIFIN 1232654

SUHADA ANNISAA BINTI MOHD 1232649

NUR SAKINAH BINTI ILIAS 1232647

NURUL AFIFAH MARSYA BINTI AHMADI 1232675


TABLE OF CONTENT

1.0 Overview of the firm and its core activity....................................................................... 3

2.0 Definition and general characteristics of the market structure.................................... 4

3.0 Production cost curve and revenue curve........................................................................ 7

4.0 The pricing strategy to maximise profit......................................................................... 12

5.0 Equilibrium conditions in the short-run and long-run.................................................14

6.0 Advantage and Disadvantage.......................................................................................... 17

7.0 References......................................................................................................................... 20

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1.0 Overview of the firm and its core activity
The Coca-Cola Company is a global company with operations in over 400 nations. For many

years, it has been at the forefront of the beverage sector. The history of Coca-Cola started

when John Pemberton in Atlanta, Georgia, mixed carbonated water with caramel-colored

liquid. His business partner, Frank M. Robinson, the bookkeeper who discovered and named

the drink “Coca-Cola” and became a trademark that remains in use until today. In 1888, after

the death of John Pemberton, Asa Candler started to take ownership of the Coca-Cola recipe

and patents completely. Today, Coca-Cola becoming a successful company due to its

worldwide recognition through entire nations.

For their core activities, The Coca-Cola Company’s main activities are engaged in selling

various range of beverages consisting of fruit juices, teas, energy drinks, bottled water,

carbonated soft drinks, and sports drinks. Coca-Cola has a vast global distribution network

because its products can be purchased in a range of marketplaces, including restaurants,

convenience shops, supermarkets, and vending machines. Furthermore, The Coca-Cola

Company is also involved in brand marketing and advertising in order to establish and

preserve its goods' great name recognition. For instance, the Coca-Cola Company reached

over 500 million Chinese customers when it became the Official Sponsor of the 2008 Beijing

Olympics. Lastly, The Coca-Cola Company is committed to product development to fulfil

public taste such as introducing new flavors of drinks and new packaging innovations. this

can be seen when the Coca-Cola company introduced sugar-free drinks and upgrades their

logo from time to time.

In conclusion, the primary activities of The Coca-Cola Company are the development,

promotion, and distribution of an extensive selection of non-alcoholic beverages, with an

emphasis on upholding an impressive worldwide brand presence

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2.0 Definition and general characteristics of the market
structure

DEFINITION OF OLIGOPOLY

An oligopoly is a market structure in which a small number of companies collectively control

significant parts of a particular market or industry. Even though the group is potent in the

market, more than one company is needed to take over the others or gain market share.

Because there is some level of competition, prices in this market are therefore acceptable.

● A few firms with large market share

● High barriers to entry

● Interdependent firms

● Non-price competition

● Price-making power

● Differentiated product

1. A Few Firms with Large Market Share

A market can be categorized as an oligopoly even if it has thousands of sellers if the top 5

companies hold a combined market share of more than 50%. This results from a small

number of sellers needing more power and ability to influence the market. Both Coca-Cola

and Pepsi hold a 72% market share lead in the industry. Coca-Cola has a 42% market share

while Pepsi has a 30% market share (Russell, 2012).

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2. High Barriers to Entry

It makes the industry more difficult for new entrants. Thus, it limits competition to group

members only. It is difficult for new companies to thrive because of oligopoly control over

specific inputs including resources, prices, and production. Additionally, barriers to entry for

new enterprises include high capital requirements, licensing, patents, market demand,

economies of scale, limited pricing, and customer loyalty. For Coca-Cola, the barrier to entry

in the industry is very high. Producing soft drinks for a wide market requires a large

investment in production equipment, brand materials, and advertising. High operating costs in

this industry prevent many companies from entering the competitive arena.

3. Interdependent Firms

In an oligopoly market structure, each firm influences the others due to its large size and low

level of competition. It includes choices made on product pricing, quality requirements, and

production scheduling in highly concentrated markets. It also implies that every company

needs to understand how others react to their actions. Global interdependence means that

businesses are willing to engage in trade with other countries worldwide. Coca-Cola shares

technology with its branches to increase profits and uphold fair trade practices (Kotler &

Keller, 2009). Global interdependence has also led to industrialization and foreign investment

between the other organizations and Coca-Cola itself.

4. Non-price Competition

Oligopolists don't worry about competing with one another on price. As an alternative, they

try various strategies including providing incentives to loyal customers, differentiating their

product offers, running sales campaigns, serving as sponsors, etc. They take this strategic

approach to avoid losing business to competitors who might engage in a price war. For

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instance, we rarely see Pepsi attempt to undercut the price of Coca-Cola. Instead, you see

these companies using creative ads to compete with each other. Thus, Coca-Cola controls the

market structure and maintains its competitive advantage over its competitors. Thus, the

company managed to have a large share in the soft drink market.

5. Price-Making Power

Dominant market participants have sufficient power to determine the cost of goods and

services in an oligopoly. And other companies or smaller participants do the same. It helps in

avoiding price rigidity and possible price wars. By sticking to the decisions made, all

businesses maintain price stability throughout the industry. Suppose the price of Coke

increases the demand for Pepsi will increase and the quantity demanded of Pepsi will

increase. Since Coke and Pepsi are substitutes for each other, there is a positive relationship

between the price of Coke and the quantity demanded of Pepsi.

6. Differentiated product

A characteristic of an oligopoly is that its participants focus on improving the quality of their

products or providing advantages to differentiate their brands. There must be differences

between the products of firms A and B, even if there are similarities. And that turns out to be

the unique selling proposition (USP) of the individual brands in the oligopolistic business.

For example, Coca-Cola and Pepsi make almost identical goods. Coca-Cola is red, while

Pepsi is blue. In addition, Pepsi contains slightly more calories, sugar, and caffeine than

Coke, but slightly more sodium. With ingredients that match so closely, neither has the

advantage of being healthier than the other.

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3.0 Production cost curve and revenue curve

Cost curves show how a company's production costs and output levels relate to one another

graphically. They are beneficial for the purpose of determining how diverse variables such as

technologies, cost of inputs, structure of the market, and demand affect a company's

profitability, efficiency, or competitiveness. A firm's maximum production capacity, price,

profit, and efficiency in various market scenarios can be determined by comparing the price

and demand curves to the cost curves. For Coca-Cola, it operates in the Oligopolistic

industry. So, the cost curve will be a kinked-demand curve. The oligopoly demand curve is

kinked because other companies are expected to follow price reductions but not rising prices,

resulting in relatively more elastic demand for price reductions and inelastic demand for price

rises. As a result, there is a discontinuity or "kink" in the demand curve at the present market

price.

P1 = Oligopoly Product Pricing

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When a company raises the price of its product, it sees a significant decrease in sales (D1).

The others do not follow the trend. It is because the other companies might be worried about

losing customers to the lower-priced competitors. The identical or related product clients will

be bought from the other company. This boosts the sales of rival businesses, which deters

them from matching price hikes. As a result, the firm that rises their cost suffers an economic

hit and decides against doing so. Thus, it displays how elastic the demand curve’s upper

region is. The other rival companies will try to match the firm’s cut in price to retain

customers and maintain the market share. Therefore,the curve bottom section is inelastic. It

indicates that someone in the oligopolist category will gain profit marginally from reducing

the cost. There is a gap in the marginal revenue curve (MR1 - MR2) because the demand

curve is kinked. When the marginal cost of their product remains between MC1 and MC2,

firms that apply oligopoly market structure are more unwilling to alter their price. When the

firm manufactures the amount of product that marginal revenue equals to marginal cost, the

gain can be maximised. Since the vertical line in the graph represents the quantity produced

by the oligopoly and the marginal cost curves of both scenarios intersect at that point,

lowering prices will not affect production volume as long as the difference between the

marginal cost and revenue is maintained. This is how the kinked demand curve hypothesis

explains price rigidity or stickiness. Average Total Cost, or ATC, is the term used to describe

the average cost per unit of output that a company produces.

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TABLE 1 : TOTAL REVENUE (IN BILLION $)

GRAPH 1 : TOTAL REVENUE (IN BILLION $)

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TABLE 2 : PROFIT (IN BILLION $)

GRAPH 2 : PROFIT (IN BILLION $)

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TABLE 3 : TOTAL COST 9IN BILLION $)

GRAPH 3 : TOTAL COST (IN BILLION $)

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4.0 The pricing strategy to maximise profit.

Pricing strategy is the method utilised to determine a product's price. It involves every

technique for figuring out the right price to maintain the highest level of profit and demand.

Examining both external and internal elements that may have an impact on profit margins is

advisable when using a pricing strategy. It frequently concentrates on one, two or many

strategies. Thus, logic is always the basis for the final decision. It considers market research

and removes any potential bias in product pricing. Powerful profits from the beginning and

long-term growth depend on a well-thought-out pricing plan.

● Competition-based pricing strategy.

It neglects to account for the cost of its product or customer demand, instead, it uses the

selling price of other companies as a benchmark. As an oligopoly market there are several

firms that sell similar products such as coke drinks from the Coca-Cola company whose

competitor is the Pepsi company. Because Coca-Cola needs to be seen as unique but still

accessible, its product prices are set at a level similar to those of its rivals. By using this

strategy, the company will be able to retain devoted customers even during sales at other

dealers by maintaining prices that are either lower or the same as theirs. This strategy is often

combined with economic pricing, in cases where the company aims to provide the best price

by minimizing production costs. Competitive pricing will help you attract customers who are

looking for reliable and affordable products while increasing profits

Coca-cola carbonated drink 500ml Pepsi carbonated drink 500ml


RM 2.40 RM 2.40

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● Penetration price.

Charge a low price initially when implementing a penetration pricing strategy, usually less

than competitors. Then, as market share increases, gradually raise the price. This facilitates

the launch of high sales volumes immediately. Although it carries some risk, it is a good way

to attract customers who might not be aware of your offer. You can switch to other pricing

strategies that yield higher profits once you've established your brand, built a strong customer

base and earned their trust. Coca -cola switched to premium pricing as soon as they got the

name. This allows them to set higher prices based on the quality they provide to earn

maximum profit.

Why is developing a pricing strategy for an oligopoly market important?

In oligopolistic markets, there are a few dominant firms, and the market is greatly impacted

by the pricing decisions made by each of these firms. Creating a pricing strategy enables a

business to take a strategic stand in this constrained competitive environment. Furthermore,

Firms in an oligopoly are interdependent, meaning the actions of one firm can influence the

others. Competition may respond differently to pricing decisions made by one business. A

company can anticipate changes in competitor pricing and respond to them more effectively

with a well-thought-out pricing strategy. Hence, developing a pricing strategy for an

oligopoly market is essential for navigating the unique challenges and dynamics of such

markets, ensuring competitiveness, and maximizing profitability in the long run.

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5.0 Equilibrium conditions in the short-run and long-run

The term ‘equilibrium condition’ in economics refers to when the company makes the most

money due to the difference between its total revenue and total costs; it is said to be in

equilibrium (Shivam N, 2016). However, the equilibrium conditions in the short-run and

long-run differ from each other. This is because the market dynamics of supply and demand

determine the price at which each business sells its goods. It means that in perfect

competition, firms are price takers, meaning they must accept the market price for their

products and cannot influence the price through their actions.

Short-run in economics means a short period to run the business, such as one year, six

months, and so on. When talking about short-run decision-making, a firm or company only

has two options: to continue producing the outputs or shut down the business. According to

Mankiw (2021), shutdown refers to a short-run decision made due to the state of the market

not producing anything for a specific amount of time. At the same time, the term exit is a

long-run decision for a firm to leave the market.

In the short run, the demand of coca cola decreases due to awareness of the buyer. In this

situation, coca cola industry try to adopt short run policy in, which they shut down their

production of the product, earn normal profit from their current stock and provide more

discount to clear their present stock for example buy one get one free.

However, in long run, they modify their product (change in quality) and launch with superior

qualities, doing more advertisement to maintain their market with new products. For example

coca cola introduces zero sugar drink in the market to increase their production.

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Figure 1 : Coca cola firm’s short run conditions (economic profit)

Figure 2 : coca cola firm’s short run condition ( economic loss)

Figure 3 : coca cola firm’s short run conditions ( normal profit)

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Figure 4 : coca coal firm’s long run conditions ( normal profit)

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6.0 Advantage and Disadvantage

Advantages
Oligopoly Perfect competition

Profit One of the most powerful companies in Compared to perfect competition

the cola market is Coca-cola, their profit market structure where the number of

is considered high, which makes them buyers and sellers both are large. So,

need to pay more tax than other the profit is not as much as firms in

beverages companies. Taxes paid will oligopoly such as profit selling

benefit the consumers back with public banana fritters across the streets.

goods and services.

Oligopoly Monopoly
Competitive oligopoly could cause Price Monopolistic market structure where
Competitiveness
Wars between other oligopolistic firms they are the only Price maker in the

to increase the consumer surplus since market. For example, Tenaga

firms try to lower the prices. In this case, Nasional Berhad as they are solely

coca-cola tried the alternative to lower the only electric provider in

the price by resizing the drinks packaging Malaysia. So there is no competition

to make it more affordable and in electrical sources.

interesting to the consumers such as the

around RM1 per bottle. Coca-cola also

studies a new recipe after being defeated

in “Pepsi Challenge”(Bai, 2023).​

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Disadvantages
Oligopoly Perfect competition

To enter the Oligopolistic firms created barriers Perfect competition has low barriers that
market
to entry to the market . It is make it easy to enter and leave the market.

challenging for small companies to The market is competitive with a big number

enter the market and compete with of sellers.

Coca-Cola, one of the biggest firms

in the cola market. Making it less

competitive and harder for small

firms to stay relevant in the market.

Oligopoly Perfect competition

Types of goods In oligopoly, there are only a few Firms in perfect competition only produce

cola producers from both homogenous products. For example,

homogeneous and differentiated ordinary salads that are identically the same

goods like cola drinks such all around the world.

Coca-Cola and Pepsi which are

quite similar yet different in certain

areas such as in taste and

packaging. However, due to small

quantities of firms in the Cola

market, consumers have fewer

alternatives reducing the diversity

of cola in the market.

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Oligopoly Monopoly

Oligopolistic firms focus more on Unlike firms in monopoly, they don't need
Marketing
advertising and marketing to such marketing and advertising as they are

persuade customers. Coca-Cola is very known with their product in an instant,

popular for its creative Tenaga Nasional Berhad as they are solely

advertisements to manipulate the only electric provider in Malaysia.

consumers. For example,

Coca-Cola created an advertisement

with interesting animation with

“Happiness Factory” themes to

attract kids' attention and plead to

their parents to buy one.

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7.0 References

Bai, Z. (2023). Business Analysis of PepsiCo and Coca-Cola Companies. In Business,


Economics and Management WEPM (Vol. 2023).

EconomicsOnline. (2022, October 12). Oligopoly explained - examples, principles and


Overview. Economics Online.
https://www.economicsonline.co.uk/business_economics/oligopoly.html/

Jindal, S. (2018, March 9). Coca Cola pricing strategy.


https://www.linkedin.com/pulse/coca-cola-pricing-strategy-shashank-jindal

Kinked demand curve: Concept, graphical representation, examples etc.. Toppr. (2019,
December 3).
https://www.toppr.com/guides/business-economics/determination-of-prices/kinked-de
mand-curve/

Pettinger, T. (2019, December 2). Oligopoly diagram. Economics Help.


https://www.economicshelp.org/microessays/markets/oligopoly-diagram/

​Puu, T., & Panchuk, A. (2009). Oligopoly and stability. Chaos, Solitons and Fractals, 41(5),
2505–2516. https://doi.org/10.1016/j.chaos.2008.09.037

Spaulding, W. C. (n.d.). Oligopoly pricing models.


https://thismatter.com/economics/oligopoly-pricing-models.htm

The Hall of Advertising. (2019, July 28). Coca-Cola-Inside the Happiness Factory: A
Documentary (2006, Netherlands). You Tube
https://www.youtube.com/watch?v=QGJsCQ4fkFY

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