Microeconomy Assignment
Microeconomy Assignment
Microeconomy Assignment
SMG1013 MICROECONOMICS
TITLE:
OLIGOPOLY (COCA-COLA)
LECTURER:
GROUP: KSB
STUDENT NAME:
NAME Matric No
ASYFA NAJWA BINTI MD TARMIZI 1232659
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
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
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
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
In conclusion, the primary activities of The Coca-Cola Company are the development,
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2.0 Definition and general characteristics of the market
structure
DEFINITION OF OLIGOPOLY
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.
● Interdependent firms
● Non-price competition
● Price-making power
● Differentiated product
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
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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
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
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
6. Differentiated product
A characteristic of an oligopoly is that its participants focus on improving the quality of their
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
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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
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.
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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
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TABLE 1 : TOTAL REVENUE (IN BILLION $)
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TABLE 2 : PROFIT (IN BILLION $)
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TABLE 3 : TOTAL COST 9IN 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
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
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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.
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
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
oligopoly market is essential for navigating the unique challenges and dynamics of such
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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
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
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)
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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
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
benefit the consumers back with public banana fritters across the streets.
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
firms try to lower the prices. In this case, Nasional Berhad as they are solely
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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
Types of goods In oligopoly, there are only a few Firms in perfect competition only produce
homogeneous and differentiated ordinary salads that are identically the same
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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
popular for its creative Tenaga Nasional Berhad as they are solely
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7.0 References
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/
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
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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