Pepsi is sold in numerous countries around the world that can be associated as Americas, Europe, Asia, Middle East and Africa. Quite a lot of those countries, Pepsi are not a leader in the cola soft drink markets; however, Pepsi is a soft drink leader in several countries including Thailand. The Pepsi soft drink or the soft drink in this report means specifically only a carbonated cola soft drink that is categorized in a monopolistically competitive market due to a condition of the industry. A monopolistic competition is between monopoly and perfect competition. There are many buyers and sellers in which firms produce products that are clone substitutes and no barrier to entry and exit for this kind of market.
According to Thai monopolistic competition type of market, not only Coke, but also some new brands of soft drink – Big Cola and RC Cola, are substitute goods that Pepsi normally competes in the market. Because of Pepsi is a normal good that would be affected by income changes. In the one hand, consumers are capable to choose which brand they prefer to. In the other hand, if they cannot consume Pepsi, they will accept other brands instead. This situation will be analyzed in the topic of demand and supply of Pepsi and the individual behavior for soft drink.
To deeply examine about the monopolistically competitive market in Thailand, the nature of industry and the managing monopolistically competitive markets will be applied for Pepsi soft drink. Moreover, graphs would assist to easily understand clearly and appropriately for each information following.
Currently, Sermsuk Public Company Limited is a leading company in beverage producer and beverage distributor in Thailand that has the number one carbonated soft drink products especially carbonated cola soft drink under brand “Pepsi”. More than 100 years that people know Pepsi and more than 50 years that Thais have experience with Pepsi. Sermsuk has introduced Pepsi in Thailand by setting up its first factory and releasing Pepsi in 1953. With strong potential of the company, strong brand of Pepsi, and continually promoting campaign of Pepsi, Pepsi has succeeded in the monopolistic market until now as the number one in the market with most percentage of market share. Marketing website reported that 36,000 million baht (exchange rate $1 US ≈ 30 Thai baht approximately) value in the Pepsi market.
Demand and Supply
Based on the law of demand, the demand of Pepsi is downward sloping. That means price and quantity demanded are inversely related. As the price of Pepsi rises (falls) and all other things remain constant, the quantity demanded of Pepsi falls (rises). The demand curve could be shifted by factors other than the price – consumer income, prices of related goods, advertising and consumer tastes, population, and consumer expectations – that affect demand. Then, the demand curve of Pepsi will shift to the left or the right depended on a kind of factor and a direction of change.
1. Consumer Income Pepsi is a normal good, so when consumers get more income, they normally consume more Pepsi at any given price. The demand curve shift to the right. Inversely, when consumers get less income, they decrease their consumption of Pepsi. Because of the change in income, the demand curve will shift to the left.
2. Prices of Related Goods In case of substitutes, an increase (decrease) in the price of Pepsi leads to an increase (decrease) in the demand for the other good. For example, if the price of Coke increases, most consumers will begin to substitute Pepsi, because the relative price of Coke is higher than before. The quantity of Pepsi demanded will tend to increase as a result an increase price of Coke increases the demand for Pepsi. Coke and Pepsi are substitutes, so a shift in the demand for Pepsi moves to the right. On the other hand, if the price of Coke decreases, the demand for Pepsi decreases. The demand shifts to the left.
3. Advertising and Consumer Tastes An increase in advertising shifts demand to the right. Advertising persuades and provides consumers with information about the existence or quality of Pepsi. The tastes of consumers also influence demand shift. For example, Pepsi Thailand has launched a current advertising campaign by presenting 3 Thai famous singers second time in the commercial in order to approach target consumers of Pepsi. The Pepsi also has a contest for consumers who buy Pepsi. For this campaign, survey results that consumers can recognize Pepsi as top of mind 67%. In addition, Pepsi Thailand expects sales of Pepsi will grow at least 10% because of advertising.
4. Population It affects the demand of Pepsi if the size of population is bigger or smaller. When population in Thailand gradually grow and so on, the number of quantity of Pepsi increases and its sales also rise. Consequently, the demand curve shifts because of changing in population.
5. Consumer Expectations The demand curve of Pepsi can be changed if changes in consumer expectations. Coke and Pepsi are substitute goods; for example, if consumers expect the price of Coke will drop for some reasons such as a promotion, they will substitute Coke more than Pepsi. As this situation, the quantity of Pepsi for future purchases will lower, but the demand of Coke will higher because its price will cheaper in the future.
The law of supply defines that as the price of Pepsi rise (falls) and other things remain constant, the quantity supplied of the Pepsi rises (falls). The supply curve is upward sloping. Figure 4: Changes in Supply of Pepsi
Variables that affect the position of the supply curve are called supply shifters, and they include the prices of inputs, the level of technology, the number of firms in the market, taxes, and producer expectations. Whenever one or more of these variables changes, the position of the entire supply curve shifts as a change in supply.
Quantitative Demand Analysis
The own price elasticity of demand of Pepsi is defined as EQx,Px = %∆Qdx ÷ %∆Px . Considering in demand and market condition, the own price elasticity of soft drink is inelastic. The value of the own price elasticity of demand when it is inelastic can be shown as |EQx,Px| < 1. To explain the absolute value of the own price elasticity is less than 1, if the price of Pepsi increases (decreases) 1%, the demand of Pepsi decreases (increases) less than 1%. Figure 5: Demand, Elasticity, and Total Revenue
The cross-price elasticity of demand of Pepsi is defined as EQx,Py = %∆Qdx ÷ %∆Py . When X and Y are substitutes – X refers to Pepsi and Y refers to Coke. Due to substitute goods of cola soft drink, the cross-price elasticity of demand is more than zero that is showed in symbol as EQx,Py > O. As a result Pepsi and Coke can surely substitute.
The Nature of Industry
Deliberating about a market structure of soft drink industry in Thailand, there are some factors such as the firm size, the concentration in the industry, technologies used in the industry, conditions of demand and market, and the potential of firms to enter or exit of the industry. To analyze how much of concentration rate of soft drink industry, one of the measure is the Herfindahl-Hirschman index (HHI). The HHI index is the sum of the squared market shares of firms in the soft drink industry, multiplied by 10,000. HHI = 10,000 ∑w i 2 The value of the HHI index lies between 0 and 10,000. As the value of HHI is below 1,000, markets are not concentrated. When the value is between 1,000 and 1,800, the markets are moderately concentrated.
What if HHI’s value is more than 1,800, the markets are highly concentrated. Refer to Figure 1; the market share of Pepsi is equal to 40%, Coke is equal to 35%, Big Cola is equal to 22%, and other brands are equal to 3%. Thus, the Herfindahl-Hirschman index for the soft drink industry is HHI = 10,000 × [ (0.4)2 + (0.35)2 + (0.22)2 + (0.03)2 ] = 3,318 Since HHI = 3,318, the soft drink industry in which Pepsi is has high concentration. There are several large firms in the industry that possess an advantage technology. However, each firm in the industry produce the soft drink that is slightly different from other firms do. Hence, Rothschild indexes are greater than zero.
Managing Monopolistically Competitive Markets
A monopolistic competition is between monopoly and perfect competition. There are many buyers and sellers in which firms produce products that are clone substitutes and no barrier to entry and exit for this kind of market. Like a monopoly, monopolistically competitive firms have market power that permits pricing above marginal cost and level of sales depends on the price it sets. Yet the monopolistically competitive firms have limited market power. Figure 6: Short-Run Profit Maximizing under Monopolistic Competition (Soft Drink Industry)
To maximize profits, the soft drink industry known as the monopolistically competitive firm produces where marginal revenue equals marginal cost (MR=MC). The demand and marginal revenue curves used to determine the soft drink industry’s profit-maximizing output and price are based not on the market demand for the product but on the demand for the individual firm’s product. Then, the profit-maximizing price is the maximum price consumers are willing to pay for Pepsi for Q* units. Consequently, short-run profit maximizing of Pepsi is in the shade that is the difference between price (P*) and an average total cost for Q* units multiply by Q* units. Because of free entry into the industry, the profits of Pepsi in the soft drink industry attract other firms in order to share the profits. Increasing firms in the industry affect profits of Pepsi and other firms in long-run under monopolistic competitive market.
In the long run, monopolistically competitive firms produce a level of output such that P > MC and P = ATC > minimum of average costs. After many firms enter to the soft drink industry in order to steal market share of Pepsi, the demand of Pepsi is reduced until profits are equal to zero on long-run equilibrium point that P1=AC. The demand of Pepsi is lower because more firms enter and Pepsi’s price is lower from P* to P1. As a result of long term, there are no more competitors to enter into the soft drink industry because of earning no profits in the industry.
The monopolistic competition of the Pepsi soft drink industry in Thailand is good to consumers. They have an opportunity to search and consume from variety products. However, this structure of the Pepsi industry is bad to society because economies of scale in soft drink products could be fully exploited.
Pepsi is produced in many kinds of containers such as 325-cc can, 1.25-liter bottle, 2.5-liter bottle, and others, so there are various price strategies including block pricing strategy, cross-subsidies strategy, and induce brand loyalty strategy. Table 4: Pepsi’s Block Pricing Information ($1 US ≈ 30 Thai baht) Places| 6-pack of Pepsi can| 12-pack of Pepsi can|
The Mall’s Supermarket (Ngamwongwan branch)| 75 baht| 148 baht| Tesco Lotus (Changwattana branch)| 70 baht| 139 baht|
Tops Supermarket (Changwattana branch)| 74 baht| 140 baht| Block Pricing:
As Table 4, 6-pack of Pepsi can and 12-pack of Pepsi can be identified the block pricing strategy that homogenous products are packaged together in order to enhance profits by forcing consumers to make an all-or-none decision to purchase Pepsi. If consumers accept to spend money and buy whole 6-pack or 12-pack of Pepsi can, they will get all can packaged in the pack and they must pay higher price for entire pack than for each can.
Suppose marginal cost of 1 can of Pepsi is equal to 7 baht, consumers purchase 1 can by paying 15 baht. To earn more profits, Pepsi applies block pricing strategy by packaging 6-pack of Pepsi can together. If consumers tend to consume whole package of 6 units each, they need to be charged 66 baht. Thus, Pepsi firm gains profit from this strategy 24 baht a package. Cross-Subsidies: Normally, Pepsi cooperates with junk-food restaurants such as The Pizza Company. The Pizza Company launches its promotion for consumers what if they buy 1 pizza they will get 1 pizza free in the same size as they order. During this promotion, although the restaurant could gain lower profit from pizzas, Pepsi would be charged more expensive. Conversely, The Pizza Company attracts consumers to buy more than 500 baht and offers free 1.25-liter Pepsi. In this case, The Pizza Company would earn profits from pizza instead.
Pizza and Pepsi are cross-subsidies products that are a type of pricing strategy in which profits gained from the sale of one product are used to subsidize sales of a related product. Induce Brand Loyalty: In order to induce consumers’ loyalty in brand of Pepsi and reduce a chance to switch brand, Pepsi usually launches average 1 advertising campaign per year and promotes the brand to not only existing consumers, also a new consumer. Currently, Thai Pepsi has launched advertising by presenting 3 Thai famous singers in the commercial. To support this campaign, the Pepsi also has a contest for consumers who buy Pepsi. If consumers concern about brand loyalty, they will consume Pepsi more than other rivals’ brand. Moreover, the loyal consumers in Pepsi will be willing to pay for Pepsi even its price will be increased.
In this report, several chapters from a text book titled “Managerial Economics and Business Strategy” – Demand and Supply, Quantitative Demand Analysis, The Nature of Industry, Managing Monopolistically Competitive Markets, and Pricing Strategies – are applied to consider the soft drink industry. Based on conditions of the market’s structure, the soft drink industry has many buyers and sellers in which firms produce products that are differentiated but closely substitutes and the market has no barrier for firms to entry into or exit from the industry. Analyzing previously, the industry could be under the monopolistically competitive markets. Since Pepsi has founded in Thailand, quite a lot Pepsi’s marketing strategies has used to promote, sell, and create brand loyalty of its products. Plenty of consumers are familiar with this brand; they have also consumed Pepsi for long.
Thus, nowadays Pepsi has still held its rank in the soft drink industry as a market’s leader with the number one market share percentage. Sermsuk (Pepsi’s production and distribution company) tries not only to earnestly step into better and more distinctive market penetration, but also to develop and promote the effectiveness of operation to the excellence of management. To conclude, Pepsi continuously develops strategies to promote its product to consumers in the Thai monopolistically competitive market. In addition, Pepsi applies new strategies to keep the number one rank in the industry. Moreover, the firm should adapt technology for an advantage to compete other rivals. Furthermore, inducing brand loyalty for consumers seems to benefit a lot. All of these could provide Pepsi as the number one so long.
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