Reference no: EM1317798

Q. Coca-Cola and PepsiCo are the leading competitors in the marketplace for cola products. In 1960 Coca-Cola introduced Sprite, which today is the worldwide leader in the lemon-lime soft drink marketplace and ranks fourth among all soft drinks worldwide. Prior to 1999, PepsiCo did not have a product that competed directly against Sprite and had to decide whether to introduce such a soft drink. By not introducing a lemon-lime soft drink, PepsiCo would continue to earn a $200 million profit and Coca-Cola would continue to earn a $300 million profit. Assume that by introducing a new lemon-lime soft drink, one of two possible strategies could be pursued: (1) PepsiCo could trigger a price war with Coca-Cola in both the lemon-lime and cola marketplaces, or (2) Coca-Cola could acquiesce and each firm maintain its current 50/50 split of the cola marketplace and split the lemon-lime marketplace 30/70 (Pepsi Co/Coca-Cola). If PepsiCo introduced a lemon-lime soft drink and a price war resulted, both companies would earn profits of $100 million. Alternatively, Coca-Cola and PepsiCo would earn $275 million and $227 million, respectively, if PepsiCo introduced a lemon-lime soft drink and Coca-Cola acquiesced and split the marketplaces as listed above. If you were a manager at PepsiCo, would you try to convince your colleagues that introducing the new soft drink is the most profitable strategy? Why or why not? Elucidate and explain how all calculations used to arrive at answer.