There are two well-known companies dominating the soft drink market and it has been that way for many years. Coke and Pepsi have dominated the market for over one hundred years and they gain such enormous economies of scale that it becomes significant barrier for new rivals to enter the market.
Coke and Pepsi sell cola drinks with similar taste and color, they are near perfect substitutes for each other products. Because their products are near perfect substitutes of each other, when one company raises its price, most of its customers that are highly sensitive to price will switch to the other company’s products due to the similarity of their look and taste.
As a result, instead of having price cuts, Coke and Pepsi tend to have non-price competition. They become mutually interdependent where their profit is depending not only on the prices but on the other company. Both companies invest a lot of money on advertising to try differentiate their products instead, to gain higher sales.
Coke and Pepsi control the industry and they have the power to set the price higher to maximize profits. The price is set higher than perfect competition because oligopoly does not apply the profit maximizing rule of marginal revenue equals to marginal cost in perfect competition.
However, both Coke and Pepsi have created a healthy competition within the cola market, where they expand and diversify their products to gain sales. This benefit the consumers. As a result, consumers will be offered more choices as compared to monopoly where consumers have no choice.
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