Abstract
This paper examines the concept of demand and supply, price elasticity, and market structures in an organizational context, with Coca-Cola as the chosen company. The latter is a multinational organization headquartered in the United States which offers a wide range of products to its customers. Currently, it has approximately 500 brands in its portfolio, whereas its flagship product is the Coca-Cola soft drink. Generally, it is considered an elastic commodity because a slight variation in its price instigates a significant increase in demand and vice versa. The company operates in an oligopolistic market structure along with its primary competitor, Pepsico. As such, they have signed a cartel agreement to control the prices in this sector while also increasing profits and preventing new entrants from successfully penetrating this market.
Introduction
Coca-Cola is a public company headquartered in Atlanta, Georgia, and operates in the food and beverage segment. The beverage firm operates in one of the most competitive environments comprising other syndicates such as PepsiCo, Red Bull, Keurig Dr. Pepper, and several other brands (Boyjoo et al., 2017). One of the factors that have led to its success is its diverse product portfolio, which encompasses brands such as Fanta, Schweppes, Fresca, Barq’s, Dasani, and many more (Serôdio et al., 2018). However, the American behemoth is best known for its signature brand, Coca-Cola, which was originally intended to be a proprietary prescription produced in 1886 in Georgia by pharmacologist John Stith Pemberton (Serôdio et al., 2018).
The company’s products can be described as everyday items because they are commodities whose demand increases as customer incomes multiply. However, as of 2019, the American syndicate launched a new product, referred to as zero sugar, where the demand has risen for the item in the marketplace (Serôdio et al., 2018). This paper discusses the concept of demand and supply, elasticity, and market structure of America’s leading corporation, Coca-Cola.
Demand and Supply
In economics, researchers have adopted some terminologies and concepts to explain the availability of a product in the marketplace. As a result, demand can be interpreted as the amount of goods and services that users are inclined to purchase from the marketplace at any given time (Kreps, 2019). However, supply is classified as the number of specific products that merchants offer to customers at a particular price. Coca-Cola’s market curve is compatible to that of other goods, and its downward change from left to right is due to a variety of factors, as indicated in figure 1 below.
This diminishing tendency, in particular, implies that the price and volume of goods demanded at a given time have an inverse correlation, as shown in figure 1 below. Furthermore, this relationship can be elaborated by the law of demand stating that as commodity prices rise, the quantity required in the market decreases and vice versa (Kreps, 2019). As a result, the cheaper the price of a diet coke, the more convenient for consumers to buy it (Kreps, 2019). In essence, it is possible to assume that price is a major contributor to demand. The effect of a price hike is shown by a shift along the demand curve, which is defined as a change in the quantity required in the market.
Similarly, the aggregate supply of the United States enterprise is similar to that of most goods in the industry, which moves upwards from left to right. It illustrates the relationship between the cost of a Coca-Cola fizzy drink and the amount of commodities produced in the market over a given time span (Chen & Voigt, 2020). The impact of an alteration in price is shown by a shift in the supply arc, also known as variation in amounts supplied, as illustrated in figure 2 below.
In reference to the American giant’s demand and supply curve, a state of evenness between the two microeconomics concepts can also be derived. Equilibrium refers to a condition in which economic drivers are balanced (Kreps, 2019). In the case of Coca-Cola, it applies when the quantity of goods demanded and supplied are equal in the marketplace (Kreps, 2019).
However, in economics, price is not the only component that influences the demand for a product. Other components are recognized to be possible causes to a product’s production and consumption. For example, an uptick in the buyer’s expendable cash means higher prices for Coca-Cola merchandise in the marketplace, causing the market trajectory to move to the right. The price of substitute products is also regarded as a determinant of Coca-Cola products’ demand (Chen & Voigt, 2020). For example, if Pepsi products’ prices rise, a subsequent upsurge in demand for Coca-Cola will be followed, resulting in the demand curve shifting to the right and vice versa.
Complementary products are commodities that add value to other items. In particular, these are wares that the customers use together, such as cereal and milk. In the case of Coca-Cola, when the prices of products from franchises such as McDonald’s and Kentucky Fried Chicken increases, it leads to a corresponding decrease in sales of soft and carbonated drinks, suggesting that the market trajectory will shift to the left (Boyjoo et al., 2017). Another significant factor in demand is the taste and inclinations of the customers.
The food and beverage sector are an industry that relies on studying the customers’ changing perceptions to balance both the influences of production and consumption. In the past, the leading American giant, Coca-Cola, launched its famous brand, “Zero Sugar,” which is a commodity developed explicitly due to the emergence of health-conscious movements advocating for eliminating excess calories in soft drinks (Maani Hessari et al., 2019). Therefore, with the introduction of this product, the American brand realized an increase in demand as many consumers preferred it over other products.
Conversely, additional factors impact the supply of Coca-Cola drinks in the market. Since it utilizes geographic segmentation, the number of consumers in a specific region is regarded as a determinant soft drinks supply. Since the American firm has a huge consumer base with high levels of brand commitment, manufacturers are able to supply large quantities of soft drinks to satisfy the consumers’ growing demand (SerĂ´dio et al., 2018). In addition, the cost of production is also a force influencing the availability of Coca-Cola products in the market. For example, an escalation in the prices of substances such as caffeine, flavor, and sugar will ultimately lead to an upsurge in the cost of manufacturing.
As a result, the producer (Coca-Cola) can develop less commodities, moving the curve to the left. When the cost of capital is reduced as a result of lower prices for constituents such as caffeine and sugar, the company will massively manufacture its Coca-Cola products, resulting in a rise in availability.
Technology is also a determinant of the supply of a particular product. Coca-Cola utilizes big data and augmented reality in several of its bottling factories across the world. It involves using glasses or a headset that covers computer graphics above what the user is looking at in reality. Such technologies have enabled the American giant to smoothen its production processes. Therefore, since this is regarded as an enhancement in the systems of production by Coca-Cola, the company significantly reduces the cost of production. As a result, manufacturers will be more able to produce more product units, and the quantity supplied will drift to the right.
The Elasticity of Coca-Cola’s Products
In economics, researchers have used some concepts to determine various characteristics and market conditions of products. Elasticity, for example, is a term used to assess the change in overall quantity demand of a product or service in response to price increases in the goods (Yadav et al., 2021). Therefore, a good is considered to be elastic if its demand changes significantly when the price fluctuates. In contrast, items of consumption are regarded as inelastic when the amount demanded changes slightly when there are price increases or decreases.
Price Elasticity of Demand
Economists have used some methods to evaluate the characteristics of products in relation to the prevailing market conditions. As a result, in microeconomics, price elasticity of demand refers to the responsiveness of the number of goods required in the market to a change in price, which is determined by dividing the relative difference in the quantity needed of a commodity by the proportional change in the item’s value. In most cases, sales increase is prompted by a decline in prices and vice versa.
Therefore, in the case of Coca-Cola, its products exhibit elasticity based on several market conditions. The demand for soft drinks from the American beverage company is considered elastic. It suggests that a slight variation in price generates a significant change in the demand, which originates from the competition that exists in the non-alcoholic beverage sector. For example, if Coca-Cola raises the prices of its carbonated drinks, customers will opt to purchase their desired products from Pepsi, and as such, the demand for Coca-Cola will decline (Maani Hessari et al., 2019). Conversely, the Coca-Cola company is conversant with the demand elasticity for its commodities and could choose to lower the price of its beverages, thereby reducing the demand for Pepsi.
When Coca-Cola products exhibit elasticity in demand, variations in price also impact its total revenue. As such, when the cost of drinks upsurges, the result will be seen in a decrease in revenue. In contrast, the reduction of prices boosts the American brand’s income levels. Therefore, if the beverage company detects a decline in its revenue, its management will offer discounts on various items to increase income (Serôdio et al., 2018). The meaning of a “perfect substitute” is based on the preference of the customers.
If they get the same satisfaction from Coca-Cola as they do from Pepsi, then these two products are considered perfect substitutes. If they think one has better taste than the other, then Pepsi is also regarded as a “nearly perfect substitute” product for Coca-Cola or vice-versa (Pereira & Frazzon, 2021). When integrating the non-alcoholic beverages industry, new enterprises cannot accomplish the economies of scale as the dominant players due to several barriers. The incumbents have already established a reliable relationship with producers, intermediaries and developed well-developed production and patented technologies.
Determinants of Elasticity of Demand
The availability of substitute products is regarded as a contributing factor to the elasticity of demand. In the case of Coca-Cola, it has numerous alternatives in the market, such as fruit juices, coffee from Starbucks, energy drinks from Red Bull and Monster Energy, and several others (Boyjoo et al., 2017). As a result, an increase in Coca-Cola costs influences customers to turn to other fizzy drinks. Furthermore, time is regarded as a driving force in the elasticity of demand since it varies with the duration of a cycle. As a result, in the long run, demand elasticity is considered elastic because consumers have more time to change their tastes and preferences.
Moreover, the income level of the customers is also an essential factor in the demand elasticity because it is elastic for the middle-income segment of the customers. This group of customers is responsive to price changes and as a result, if the price of Coke’s fizzy drinks rises, demand from this group of customers will fall (Pereira & Frazzon, 2021). Lastly, Coca-Cola is a product that was developed specifically for the millennials, but other groups of consumers are welcome to purchase it (Schmacker & Smed, 2020).
In the long term, demand is somewhat inelastic because if its prices rise, even Coca-Cola enthusiasts will change their preference due to financial constraints, whereas in the short run, demand is somewhat elastic because if its prices rise, even Coca-Cola enthusiasts will change their preference due to financial constraints, whereas.
Coca-Cola’s Market Structure
A market structure refers to the characteristics and intensity of rivalry in the market for products and services. Some of the fundamental features of a market are the existence of both buyers and sellers, one commodity, and an area (Geras’kin & Chkhartishvili, 2017). Therefore, the configuration of a market both for items and services is determined by the attributes of competition prevailing in a specific industry. Several examples of market structures exist, such as monopoly, oligopoly, perfect, and monopolistic competition (Geras’kin & Chkhartishvili, 2017). The Coca-Cola Company operates in the food and beverage sector is has other dominant players such as PepsiCo and Red Bull.
The non-alcoholic beverage industry occupied by Coca-Cola and its competitors can be described as oligopolistic in nature. It is a market structure that has a few companies that compete against each other. One of its primary characteristics is interdependence, where the companies operating in it cannot act autonomously of each other. Moreover, strategy is considered crucial for self-sufficient firms in an oligopolistic environment (Kreps, 2019).
Such organizations have to anticipate their competitors’ business moves, especially in price variations and other non-price approaches to ensure that they remain at the peak of the competition. Coca-Cola and PepsiCo are an archetype of an oligopolistic industry since they sell almost similar products and control these products’ prices based on the approaches adopted by each company. A homogeneous commodity is regarded as an item that is either physically indistinguishable in the eyes of the consumers. Since the clients are not able to separate one product from the other, it becomes challenging for a manufacturer to compete on the importance (Kreps, 2019). In essence, the Coca-Cola operates in an oligopolistic segment dominant by PepsiCo.
Depending on the market conditions, the American beverage company may alter its pricing approaches. For example, it may change its products’ prices according to a kinked demand curve. In an oligopolistic market, a company such as Coca-Cola may face the kinked-demand curve due to the rivalry from other competitors (Kreps, 2019). Therefore, it orchestrates an increase in price above the equilibrium point, assuming that other competitors in the industry will not make subsequent price increases. In most cases, both Coca-Cola and Pepsi will adopt a low-pricing strategy to increase their market profit, especially during the summer holidays when they both incorporate aggressive competition to boost their sales in a bid to improve their profitability (Kreps, 2019). Therefore, the nature of this oligopolistic environment influences the pricing approaches adopted by the American beverage giant.
Most oligopolists apply game theory principles for pricing in various scenarios. In 2013, Coca-Cola decided to lower the prices of the 200ml drink, which affected their sales as this subdivision mostly favors low-income families and other individuals with less disposable income (Boyjoo et al., 2017). As such, this suggests that a variation in price can result in a considerable change in quantity demanded, whereas an increase in demand can help the American brand reach large-scale production and subsequently reduce average total costs in the long run because of its importance of economies of scale (SerĂ´dio et al., 2018).
In the same year, the company introduced its affordable pricing tactic in which it minimized its prices, compelling Pepsi also to lower its costs as they would have lost a considerable share of the market. Moreover, these two organizations were not able to sustain the market at low prices, and as such, they both retracted from their approaches. Since then, the prices of soft drinks in this industry have remained stable.
Companies in an oligopolistic industry primarily implement approaches as their negligible costs vary and still lead to similar industry prices. Therefore, the marginal cost of manufacturing products is reliant on the amount of finances organizations allocate to research and development and marketing (Chen & Voigt, 2020). It is achieved in a bid to distinguish the products and lower the cross-price elasticity of demand. Coca-Cola has minimized its price, and this would contribute to a rise in its demand in the short term since it is currently cheaper than Pepsi in this category (SerĂ´dio et al., 2018).
Other significant factors to consider in the oligopolistic market are the barriers to entry. For example, there are considerable impediments that may hinder new entrants from penetrating the non-alcoholic industry. A cartel agreement has been signed by the leading brands in the beverage sector to inhibit other players from successfully penetrating the industry. A cartel group is a small number of organizations acting together to reduce cost and increase both price and profit.
Conclusion
This paper has addressed the important concepts of demand and supply of Coca-Cola, America’s leading beverage business. Essentially, the global brand operates in an oligopolistic market dominated by Pepsico and other small companies. The principles of finance and economics are important in organizational management because they enable managers to gain insight into the factors that shape a product’s demand and supply. Therefore, in the case of Coca-Cola, the law of demand helps to determine the appropriate quantities of products that should be supplied to the market.
Moreover, its management also discerns the forces that shape its products’ demand elasticity and how to react to the market conditions to increase sales and revenue. In essence, these concepts play an imperative role in enabling organizations to balance between the forces that boost products and ones that undermine them. Coca-Cola should consider investing in research and development to develop its product portfolio as a way of preventing future uncertainties related to demand and supply.
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