Historically, Coca-Cola has dominated the American soft-drink industry.Sales and profits have grown rapidly ever since Coke was first introduced.Until the 1950s, there was really no second-place firm worth mentioning.Pepsi-Cola, Coca-Cola's nearest competitor, was a relatively new drink that cost less to manufacture, but its taste was generally thought to be less unique and satisfying than Coke's.Pepsi's major selling point was that it offered more cola for the same price; Pepsi came in a 12-ounce bottle that sold for approximately the same price as Coke's famous 6 ounce bottle.Pepsi exploited this difference by advertising "twice as much for a nickel, too."Nonetheless, with its plain bottle and paper label (that often got dirty in transit), Pepsi was generally looked upon as second-class.To many it was "the poor man's drink."

When Alfred N. Steele came to the presidency of Pepsi-Cola, he recognized that the company's main hope for competitive vitality lay in transforming Pepsi into a first-class soft drink and in not being a cheap imitator of Coke.Steele assembled a two-phase grand offensive against Coke.In the first phase, which lasted from 1950 to 1955, a determined effort was made to improve Pepsi's taste.The formula was desweetened.Greater quality control was established over local bottlers, who previously added varying amounts of carbonation to the syrup, with the result that Pepsi's taste varied from locale to locale.Pepsi's bottle and other corporate symbols were redesigned and unified.Following up on the product improvements, Pepsi launched an advertising campaign aimed at upgrading Pepsi's image.The ads featured attractive, well-dressed women and debonair men drinking Pepsi, against a background of high-income surroundings.Along with this went the advertising theme "the light refreshment," suggesting indirectly that Coke was "heavy".At the same time, Pepsi made the decision to take dead aim on the "take-home" segment of the soft-drink market in the first phase of its grand offensive.Coca-Cola was particularly strong in the "on-premise" segment (soda fountain sales, vending machines, and refrigerated sales).Pepsi felt that the rifle-shot approach, aimed where Coca-Cola was weakest, gave it the best chance for success.Thus, Pepsi massed its efforts at penetrating the market for grocery retail sales of soft drinks - where it already had a small foothold.The final aspect of Pepsi's phase-one offensive involved singling out 25 cities for special promotional efforts.In these 'push' markets Pepsi added company funds to those of the local bottlers for advertising and promotion.The concentrated effort to win market share in these 25 cities was successful in increasing Pepsi's market share.

By 1955, Pepsi's phase-one programs had made enough headway to warrant beginning phase two of the grand offensive.It consisted of attempts to increase Pepsi's share of the 'on-premise' market where Coke was so solidly entrenched.However, Pepsi limited its efforts to the vending machine and cold-bottle sales segments because the soda fountain segment showed signs of maturity and perhaps even decline.Pepsi introduced some new bottle sizes to go along with its standard 12-ounce bottle in an attempt to offer more convenience to customers in the take-home and cold-bottle market segments.Additionally, Pepsi offered financing to those bottlers who were willing to buy and install Pepsi vending machines and to begin to push this part of their business.

As Pepsi's phase two began to strike chords of success, Coke decided it was time to initiate some kind of response. Until the latter stages of Pepsi's grand offensive, Coke's attitude had been mostly "ho-hum."For the most part, Coke refused to acknowledge that Pepsi was a threat.

Many of Coke's local bottlers had become well-to and complacent, owing to Coke's previous success, and were not accustomed to tough competition.Initially, Coke's response consisted of launching new advertising campaigns, using such themes as "the really refreshed" and "no wonder Coke refreshes best."Coke also introduced new bottle sizes.Both steps perked up Coke's sales.

In the early 1960s, Pepsi's rate of growth slowed, and Pepsi responded with two new advertising campaigns - "be sociable" and "think young."The latter was quite successful in tying Pepsi to the youth market, a segment which accounted for the highest per capita consumption of soft drinks.But the youth theme, by implication, also tended to mark Coke as an old-fashioned drink.Coke responded with its new advertising theme of "thinks go better with Coke."

Then competition, which in the past had revolved largely around taste, bottling, and advertising, moved to new arenas.The first concerned the no-deposit bottle and the use of aluminum and steel cans.Both companies found that it was critical to design their containers carefully and time their introduction astutely.For instance, it was discovered that the metal can affected the taste; it was also discovered by one soft-drink company that the aluminum can it was about to introduce was eaten through by its product within a few days.

The second competitive development concerned product innovation.Using the principle of surprise, Royal Crown Cola introduced what proved to be a major new product - the diet soft-drink.RC's Diet Cola was formulated without real sugar and was intended to appeal to the calorie-conscious segment of the market.Originally, this class of buyers was thought to constitute a small part of the soft-drink market, but it turned out that diet drinks had very broad appeal.Royal Crown's major success quickly forced both Coke and Pepsi to formulate their own dietetic soft drinks.

The third new competitive arena emerged when the soft-drink companies realized that a whole set of other good-tasting drinks could be formulated besides colas.Seven-Up's "un-cola" theme was so successful that Coke brought out its version of the uncola - Sprite.Attempting to capitalize upon this development, Dr. Pepper sharply increased its advertising budget and market penetration efforts.

Although Coke has continued to retain its number-one position in the industry, Pepsi has emerged with a muchstronger second-place market share and the smaller firms - Royal Crown, Seven-Up and Dr. Pepper - also have made inroads, all at Coke's expense.

Questions:

1.(a)Critically examine thepossibleeffectsofPepsi'spricecutting

Strategy on the industry?

(b)Explain the conditions under which Pepsi's price cutting will not

emerge as an unprofitable strategy for the company.

2.Assuming a collusion between Pepsi and Coca Cola, discuss the pricing strategy and sustenance of this collusion.

3.Assume Coca Cola is exploring the possibility of opening new markets for its products.Discuss the pricing strategy to be adopted