The Coca-Cola Company (Coca-Cola) and PepsiCo have a combined market share of approximately 70 percent of the soda market, but for the purposes of this example, assume that they are a Cournot duopoly. The figure shows the hypothetical market demand curve and marginal revenue curve for 12-packs of soda. For both companies, suppose that the marginal costs and average total costs are constant at $2 per 12-pack of soda.

a. If Coca-Cola is the only firm in the market, draw a figure showing the equilibrium quantity and price of a 12-pack of soda.

b. Suppose that PepsiCo enters the market and produces 400 million 12-packs of soda.
In the figure you drew for part

a, show how Coca-Cola’s managers respond.

c. If PepsiCo produces 800 million 12-packs of soda, in the figure you used for parts a and

b, show how Coca-Cola’s managers will respond.

d. Identify three points on Coca-Cola’s best-response curve.

Transcribed Image Text:

Price and cost (dollars per 12-pack) $7 $6 $5 $4 $3 $2 $1 0 DMARKET MC = ATC MRMARKET 100 200 300 400 500 600 700 800 900 Quantity (millions of 12-packs per year)