MBA PepsiCos Discussion

Description

Based on the information provided, the two scenarios are 1) PepsiCo triggers a price war with Coca-Cola or 2) reaches an agreement with Coca-Cola to split the markets, representing different possible outcomes that can be analyzed through game theory.

Game theory is a model of decision-making in situations where the outcomes depend on the actions of two or more individuals or organizations (Ross, 2019). In this case, Coca-Cola and PepsiCo are two firms that are competing in the soft drink market, and their actions will determine the profits they earn.

In the first scenario, where PepsiCo triggers a price war with Coca-Cola, both firms would earn profits of $100 million, which is still higher than PepsiCo’s current profit of $200 million. This scenario represents the Nash Equilibrium, which is a situation where both firms are better off by not deviating from their strategies (Chen, 2022).

In the second scenario, where Coca-Cola acquiesces and allows PepsiCo to split the markets 30/70, PepsiCo’s profits would increase to $227 million, which is higher than both its current profit and the profit in the first scenario. This scenario represents a cooperative win-win situation, where both firms are better off by reaching an agreement rather than competing in a price war (Wikimedia Foundation, 2022).

Therefore, based on the managerial economic theoretical analysis, introducing the new lemon-lime soft drink and reaching an agreement with Coca-Cola to split the markets 30/70 would be the most profitable strategy for PepsiCo. This strategy would increase the firm’s profits and diversify its product portfolio, while avoiding the negative effects of a price war.

References:

Ross, D. (2019, March 8). Game theory. Stanford Encyclopedia of Philosophy. Retrieved January 31, 2023, from https://plato.stanford.edu/entries/game-theory/

Chen, J. (2023, January 12). Nash equilibrium: How it works in game theory, examples, plus prisoner’s dilemma. Investopedia. Retrieved January 31, 2023, from https://www.investopedia.com/terms/n/nash-equilibr…

Wikimedia Foundation. (2022, November 30). Cooperative game theory. Wikipedia. Retrieved January 31, 2023, from https://en.wikipedia.org/wiki/Cooperative_game_the…

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