Prior to 1999, PepsiCo did not have a product that competed directly against Sprite and had to decide whether to introduce such a soft drink. By not introducing a lemon-lime soft drink, PepsiCo would continue to earn a $200 million profit, and Coca-Cola would continue to earn a $300 million profit. Suppose that by introducing a new lemon-lime soft drink, one of two possible strategies could be pursued:
(1) PepsiCo could trigger a price war with Coca-Cola in both the lemon-lime and cola markets, or (2) Coca-Cola could acquiesce and each firm maintain its current 50/50 split of the cola market and split the lemon-lime market 30/70 (PepsiCo/Coca-Cola). If PepsiCo introduced a lemon-lime soft drink and a price war resulted, both companies would earn profits of $100 million. Alternatively, Coca-Cola and PepsiCo would earn $275 million and $227 million, respectively, if PepsiCo introduced a lemon-lime soft drink and Coca-Cola acquiesced and split the markets as listed above. If you were a manager at PepsiCo, would you try to convince your colleagues that introducing the new soft drink is the most profitable strategy? Why or why not (explain)? Can you draw any general conclusions from this case study