You know you have a problem if your sales trail even in developing markets. You know you have a serious problem if your growth in volumes is barely 1% from a year ago.

That's the case with Coca-Cola India whose growth in the critical April-June quarter came crashing down from 20% a year ago. It was the worst performance of the Indian unit of the world's largest beverage maker in five years.

New Game Plan

The India units of Coca-Cola and PepsiCo are critical bastions of growth for their American parents, but are now confronted with the threat of a slowdown in volumes. Executives of both companies have been forced to recast their strategy through a combination of price cuts, differential pricing (exactly the same product being sold at different prices to different consumers), trade discounts, restructuring of distribution networks and stepping up capacities at bottling plants."

"Faced with slowdown threat, Coca Cola & PepsiCo experiment with strategies to push volumes growth", The Economics Times, June 2013

You have been hired by Coca Cola to devise their best differential pricing strategy.

Assume Coca Cola segments the market into two groups- Group A and B. (You can motivate these groups by keeping in mind one of your market segmentation mentioned in a)) Assume that consumers in Group A and B have preferences

U^A(x, C) = C^0.2x^0.8

U^B(x, C) = C^0.7 x^0.3

Where x: is quantity of product x and C is the quantity of 200 ml Coca Cola.

If the average income in Group A is Rs 80,000 per month and that of Group B is Rs 40,000 per month and price of x is Re 1. Assume group size of A is 100 and that of B is 50.

(For Group A: MU_C = 0.2C^-0.8X^0.8 ; MU_X = 0.8C^0.2X^-0.2 )

(For Group B: MU_C = 0.7C^-0.3X^0.3 ; MU_X = 0.3C^0.7X^-0.7 )

1. Find the aggregate demand for coca cola for group A (1.5 points)

1. Find the aggregate demand for coca cola for group B (1.5 points)

1. Find the aggregate demand for coca cola (2 points)

Assume that Coca Cola has dropped the idea of differential pricing but is mindful of the segmented market.

"Starting this month, all Coca-Cola's beverages in 200 ml bottles will be sold at a flat Rs 10, down from Rs 15, a top trade official told ET Magazine. "Its heavy discounting and at the cost of profitability. The company is pushing volumes almost as if in panic," he says."

"Faced with slowdown threat, Coca Cola & PepsiCo experiment with strategies to push volumes growth" The Economics Times, June 2013

1. Find the arc elasticity in this range for the aggregate demand curve. (3 points)

1. How will revenue change for Coca-Cola based on your analysis? (2 points)