Oligopoly

WHAT IS OLIGOPOLY?

          Oligopoly is a market where there are few large sellers competing with each other. Oligopoly exists when the number of firm in an industry is so small that each of the firm must consider the reactions of rivals in formulating its price policy. “Oligopoly is commonly found in heavy industry or in products marketed nationally” (Peterson, 1991). The firms in an oligopoly are able to either use the low-price strategy or high-price strategy in order to maximize profit.

Coca Cola and Pepsi

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In the many years that had passed by, Coca Cola and Pepsi were in an oligopoly market that sells homogeneous products which are similar products. This allows the both firms to be able to control the prices of their product but their actions would have a big impact if they regularly make changes in their prices. This is why the both of them have to be very careful in making decisions. If there is a change in price, normally it would be according to the kinked demand curve. This basically means that in every oligopoly there is a downward sloping demand curve however the reaction of rivals to change in price and output affects the elasticity (Welker, 2012). Among these two firms which are Coca Cola and Pepsi, they both use the same pricing strategy that is by using the low-price strategy in order to attract their potential customers.

            Usually when one of the firms decides to go with the low-price strategy, the other firm will also quickly go with the flow at the same time in order to maximize their profits. For instance, when the hot seasons like summer in America arrives, both the firms will set their product price to the lowest that they can and have competition with each other because they know that when hot seasons are here, people will tend to drink more and these cola drinks would quench their thirst. This enables both the firms to have an increase in sales and which leads to an increase in their profit as well. There is always a game theory applied to be a market share and a game theory basically means that it helps firms to raise profits. High barriers can be clearly seen to be able to come into this market as the Coca Cola Company and the Pepsi Company has privately signed a contract with each other to ensure that each of the firm is a cartel and to restrict other competitions. The definition of cartel is an association of manufacturers or suppliers that maintains prices at a level that the whole association agrees.