Industrial Organization: Contemporary Theory and Empirical Applications, 5th Edition

9

Static Games and Cournot Competition

One of the most successful companies in the history of business is Coca-Cola. Indeed, “Coca-Cola” is said to be the second most well-known phrase in the world, the first being “okay.”¹ Yet despite its iconic status in American popular culture, Coca-Cola is not a monopoly. Coca-Cola shares the carbonated soft drink market share with its archrival PepsiCo. An ongoing battle for market share has engaged these two companies for almost 100 years. The cola wars have been fought with a number of strategies, one of which is the frequent introduction of new soft drink products. Pepsi launched Pepsi Vanilla in the summer of 2003 in response to the year-earlier introduction of Vanilla Coke. In 2006, Coke initiated its biggest new brand campaign in twenty-two years for its new diet drink, Coke Zero. This followed Pepsi's revitalization of its Pepsi One brand made with Splenda sweetener instead of Aspartame.

In fighting these cola wars, each company must identify and implement the strategy that it believes is best suited to gaining a competitive advantage in the soft drink industry. If Coca-Cola were a monopoly, it would not have to worry about any rivals. Nebbither does a perfectly competitive firm. The pure monopolist has no rivals and the company in a perfectly competitive market has no effect on its rivals. Each such firm is so small that its decisions have no effect at all on the industry.

However, Coke, Pepsi, and many if not the majority of other ...