Problem
Analyze the following scenario by incorporating what you learned and answer the following question:
Coca-Cola and PepsiCo are the leading competitors in the market for cola products. In 1960 Coca-Cola introduced Sprite, which today is among the worldwide leaders in the lemon-lime soft drink market and ranks in the top 10 among all soft drinks worldwide. 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, less than Coca-Cola's profit of $300 million.
Suppose that by introducing a new lemon-lime soft drink, one of two possible strategies could be pursued:
• PepsiCo could trigger a price war with Coca-Cola in both the lemon-lime and cola markets.
• Coca-Cola could acquiesce and each firm would maintain its current 50/50 split of the cola market, while splitting 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, they could split the markets.
• Imagine you are a manager at PepsiCo and explain your answer to the following question:
• Would you try to convince your colleagues that introducing the new soft drink is the most profitable strategy by explaining the reasoning and theoretical analysis? Why or why not?