Table of Contents
Introduction
Price Elasticity of Demand
Price
elasticity of demand is the rate of change of demand of the quantity that
occurs due to change in price of the quantity.
Ed =
% Change in Qd
% Change in Price
Pepsi
Co has been among the leading companies in the beverage industry despite the
fact that it has to face competition at multiple levels like competing with
domestic as well as international rival companies of the industry. Following is
analysis of ‘the price elasticity of demand’ of Pepsi Co:
Availability of Substitute
Pepsi
operates in a market where substitutes are easily available and the market has
been flooded by numerous brands of aerated drinks like Thumbs Up, Coca Cola, Dr
Pepper, etc. These competitors of Pepsi Co produce perfect substitutes like
Coca Cola produces Sprite in competition to 7 up which implies that priority of
consumers is primarily based on price factor (Business Week, 2003). Therefore,
if the company increases price of its products then the consumers will
definitely shift to the relatively cheaper substitutes like Coca Cola.
Level of Income
Middle
and lower income level segments of the society are sensitive to price and they
tend to choose the products which are cheaper. Since the beverage industry has
generic and convenient goods, thus brand loyalty does not exist a great deal
and most of the societies have large segments of poor and middle income that
prefer to buy a commodity offered at cheaper price. Major target market with
high potential of growth lies in emerging economies like China, India, Brazil,
etc where majority of the population is price sensitive. Therefore, if Pepsi Co
increases its prices, the impact will be negative upon the demand of Pepsi.
Time
The
demand of Pepsi Co products is primarily related to the factor of time which
implies that the price elasticity of demand varies with the passage of time and
over the length of a time frame. The elasticity of demand remains elastic in
the long run as people get time to shift tastes, preferences or to alternate
choices while in the short run, the elasticity of demand remains inelastic (Blomstermo
et al. 2002). Thus it is quite difficult for the Pepsi Co to increase prices
due to long term negative effects.
Proportion of Income Spent on the Commodity
Carbonated
drinks like Pepsi are basically targeted for the young segment of the market
which implies that demand of the Pepsi Co products is relatively elastic in the
long run because in case of increase in price, even the hard core Pepsi loyal
customers would switch to other choices and preferences due to constraints in
their pocket money, however the demand is inelastic in the short run (Betsy,
2003).
Therefore,
it is implied from the above discussion that the company’s price elasticity of
demand is greater than 1 and it is elastic which means that increasing price
may result in a shift of demand among the customers of the Pepsi Co.
Market Structure
The
beverage industry operates in a very intense situation where the competing
firms are many and the competition is faced at multiple levels. In most parts
of the world, government intervention is not seen in the market of beverages and
companies can easily enter or leave the market. The beverage firms compete neck
to neck in the market upon the factor of price and due to saturation in the market;
mostly companies devise promotional strategies to enhance their demand and
revenues (Smith). Following are few aspects of the market structure in which
Pepsi Co. operates:
Level of Competition
The
competition in the market of beverage firms is quite intense and the space to
compete on the basis of price is too narrow which reflects insignificant difference
among prices offered by different firms. It becomes too difficult for the operating
firms to increase their prices as the level of competition is too high and
fixed cost structure persists in the market. The cost of inputs is almost the
same incurred by different companies like Pepsi, Coca Cola, etc like costs of
standard bottling, concentrates, distribution, operations and labour. All major
players of the market compete through heavy advertisements and promotional
campaign to increase the demand of their products (Blomstermo et al. 2002). Following
is the comparison of prices Pepsi, Coke and Dr Pepper:
Pepsi, Pepsi Cola, 7up
Cane-330 ml- $1.35
Coca Cola, Sprite, Coke
Classic 330 ml- $ 1.35
Dr Pepper, Dr Pepper
Diet- 330 ml- $ 1.65
The
above figures reveal that the variation of price among the competitors is quite
nominal.
Local Competitors
Pepsi
Co operates in numerous countries worldwide and it faces fierce competition
from many local firms that better understand the needs and wants of the local
market and they have adequate knowledge of consumer behaviour as well. The
local firms primarily exploit the factors of culture and religion in the
societies which are sensitive to these two factors. Major target market of the
Pepsi Co lies in the emerging economies where the local firms give tough
competition. In different countries, different local firms are the direct
competitors of Pepsi. Like in India, Pepsi competes with RC Cola, Amr Cola, etc
and in USA it competes with Dr Pepper, Kraft, etc (Business Week, 2003).
Global Competitors
Pepsi
Co is a multinational enterprise and it has been operating in almost every nook
of the world. The company faces strong competition by the rival global firms
like Coca Cola, Thumbs Up, Gourmet, etc. The nature of competition is very
tough as the companies follow the places where they do not operate at present
and such internationalisation by beverage firms results in intensity of
competition and saturation of market (Betsy, 2003). Therefore, the basic
strategy of Pepsi Co against its global rival firms is ‘Survival’ in the short
run to keep its market share and demand intact.
References
1.
Betsy M. (2002), Pepsi and Coke Roll Out Flavors to
Boost Sales. The Wall Street Journal.
2.
Business Week Online (2003), Call It the Pepsi Blue
Generation.
3.
Blomstermo, A., Eriksson, K. and Sharma, D.D. (2002), Knowledge
and time: a forgotten factor in the internationalisation process of firms
Internationalisation, Pergamon, Oxford, pp. 263-83.
4.
Smith, A. F. The Oxford companion to American food and
drink. Oxford University Press US. p. 371
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