Price discrimination strategies in the Pepsi and Coca-Cola soft drink market

Price Discrimination and Related Concepts

In this paper, we will discuss some basic concepts regarding price discrimination and its related topics. We will first choose a product and outline its market structure, then by using a technique as described in the article written by Michael E. Porter we will discuss how the price of our chosen product should be decided so that profits are maximized. Finally, we will discuss how the pricing technique would affect the profit, supply and demand of each segment of our market. For the reader to have a more general and easy idea regarding these mentioned concepts, we have chosen Pepsi as our main product.

Market structure

Pepsi is a global brand which originated in the United States more than a century ago. It is a carbonated water drink and it also owns many different subsidiaries alongside its main product such as mineral water and other cold drinks. When having a close look at its market structure, we see that it has many important rivals in the business but most notably it faces competition from the firm Coca Cola which is also known as Coke.

Both of these firms have been logged into intense battle for supremacy over each other since many decades and therefore if we assess the market structure of Pepsi then it is seen to have a sort of duopoly since both Pepsi and Coke nearly dominate the market of cold drinks. Pepsi have even been known to use barriers to block the entry of newer firms which may have proved to be great competitors later on in their lifetime. Pepsi can also be classified as being under monopolistic competition where the overall industry is competitive but the other corporations are able to create some sort of influence in the market through product differentiation and brand recognition.

Affect of pricing technique

Keeping up a proper pricing technique is very important when maintaining a proper supply, demand and profit levels of any product. Let's view how pricing affects each of these areas in some detail.

"The supply portion deals with all of the goods bought by the firm in order to make its end product" (Tye, 1990), the prices which are relative to the bought goods are closely related to the end prices since if these goods are bought up at a nominal sum then it is easy to sell the product at a nominal sum as well, whereas if the goods are bought at an expensive rate then it is very difficult to sell the end product at a nominal rate.

It is therefore recommended for the firms to carefully choose better supply partners in terms of both quality and rate since it would have a huge impact on their pricing of the end product.

Looking at the demand, then we see that it is more flexible and in the firm's control than the supply factor. The firm can change demand based on various different other factors such as proper advertising techniques, better quality product, better reviews and so on. In terms of pricing, this greatly determines as to how much the product would be sold and what type of consumers would buy it.

The best price level for Pepsi would be in a range which is affordable by everyone and which is also commonly observed to be taken by Pepsi, it also offers its product in various different quantities and range the price tag accordingly. This greatly helps the firm in targeting wider range of consumers.

Finally, lets focus on the profit sector related to the pricing technique, it is commonly seen that during peak demand the price of any product is raised whereas at low demand the price is reduced, in case of Pepsi it would be a mistake to raise the price of its product during its peak demand because of the fierce competition which surrounds it. Therefore it is better for them to offer discounts or other unique offers during peak sales periods so that the consumers are more interested in buying the product.

Also, during low sales periods it is better to offer many different schemes which attract the common consumers. Many similar firms offer lucky draws to the consumers which allows them to win expensive prizes, Pepsi have known to carry out similar practices throughout the globe where it has offered expensive goods for the lucky few consumers who buy their product. Practices such as these have seen to increase the sales of the firm by many folds since the common buyers get a chance to have something which they normally can not have.