I have an economics question?

Question

Let's say that you are the CEO of Coca-cola, how would the XED(Cross elasticity of demand) concept assist you to respond to a cut in the price of Pepsi?

Answer 1

Typically (and hypothetically), Pepsi and Coke are substitutes for each other.  So a decrease in price for Pepsi will move demand towards Pepsi, thus requiring an immediate response or risk market share.

But you asked about the CEO of Coke, which suggests real-world response rather than college textbook response.

The profit margin on soda is pretty slim, considering they sell 2-liters for $1.29 and occasionally a supermarket will sale it at $.89.  The market is pretty well established too, so it's not like Pepsi can double production in a short time.

So if I were the CEO of Coke, I'd wait out the price drop let Pepsi lose money on every soda sold and have to deal with their shareholders while simultaniously giving coupons to those penny-pinchers who absolutely won't spend a penny more for Coke than Pepsi.

Those who care absolutely about price will have coupons and those who pick Coke by the market branding will pay regular price.

Answer 2

It wouldn't.  Like Big Oil, the soft drink industry is a cartel of suppliers who do not compete with each other in the long run b/c  Coke and Pepsi make more money that way.

It's only the sales reps that play these stupid games on a retail level.  XED kicks in after a 50 cent decrease in price of a 2 litre  bottle of prime cola.  That's when Coke and Pepsi drinkers begin to take notice of price difference.  100% XED for prime colas?  Not a chance.  I'm a Coke drinker and will be until the price diffrence between 2 litres is $0.50.