Why do Pepsi and Coca Cola cooperate?
Why do Pepsi and Coca Cola cooperate?
There are two kinds of people in this world: the Pepsi lovers and Coke followers. Once a person decides on a preferred brand, it is surely a rare thing for each brand-lover to switch their preference out of the blue. Both of these companies are quite big and successful―I cannot imagine anyone with vending machine in their area not exposed to Coca Cola or Pepsi. As a consumer, it seems natural that these giant competitors should hate each other and slash out at each other in this brutal soft-drink war. However, according to the article, “Why are Coke and Pepsi never on sale at the same time?” Coke and Pepsi are almost never on sale together. For half a year, the article remarks, these companies ran non-overlapping price promotions; with the help of statistics, the chance of this happening by pure chance is infinitesimally small. Also, it’s not just Coke and Pepsi that are doing this. The Cottenelle vs. Charmin toilet papers, Kellogg’s vs. General Mills cereals, and many more brands apparently run cooperative price-promotions.
So why do they cooperate?
The article mentions that because most customers would stay loyal to their preferred brand, sales are effective only when there are high enough appeals for cheaper price. Then, consider the following cases:
With limited number of customers,
- If both products go on sale, the customers would still be choosing their original favored brand―no change in the flow of consumption.
- If one product goes on sale, then the company with sales gets more customers.
- If none of the companies go on sale they still get same number of customers.
Now we have a game here:
- When none of the companies go on sale, they will get equal number of customers at normal profit: (NS, NS) = (2,2)
- When both companies go on sale, they will get equal number of customers at reduced profit: (S,S) = (1,1).
- When only one company goes on sale, one company gets more customers, and more profit: (NS, S) = (1, 3).
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Pepsi |
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Coke |
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S |
NS |
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S |
(1,1) |
(3,1) |
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NS |
(1,3) |
(2,2) |
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In this chart, pure strategy equilibrium is (NS, NS), with strictly dominated strategies as either (NS, S) or (S, NS). In other words, all other strategies except for (S, S) are helpful to either of the companies.
Online Resource: http://mindyourdecisions.com/blog/2011/09/06/why-are-coke-and-pepsi-never-on-sale-at-the-same-time-an-answer-from-game-theory/