In the carbonated soft drinks industry, Coke Cola and Pepsi Co are the biggest players in the market for aerated beverages. Both the companies have been competing strongly against each other for decades. The market is dominated by these two industry leaders with a total market share of 72%; Coke’s market share is 42% and Pepsi’s 30%. This is known as an oligopoly market; where there are few large firms competing with each other in the industry. Since both the company’s market share so large, the market is very close to a duopoly (other players having a very small impact on the market). Hence we assume this to be a situation of duopoly.
The 2 companies sell products which are very close substitutes and are constantly fighting for greater market share. A person may buy a Coke product instead of a Pepsi one, and vice versa. The objective of both is to maximize their profit. Hence, we can say that these 2 players are involved in a non-cooperative game, the objective being to garner the most profit, and capturing market share being the most effective way to do so. Since Coke and Pepsi are perfect substitutes, the price elasticity of demand should be perfect elastic. However, there are some factors that results in a fairly elastic demand. When Coke increases its price, most of its customers that are highly sensitive to price changes will switch to Pepsi due to the similarity of the taste. Nevertheless, some of its customers that are highly loyal are willing to pay more for Coke