The estimates of how much prices would have to differ between Coke and Pepsi to shift market
Question:
The estimates of how much prices would have to differ between Coke and Pepsi to shift market share by 5% next year (variable x). In other words, if Coke and Pepsi post the same price next year, their market shares will not change. However, if they post different prices, market share will shift. The magnitude of the shift is given as a 24 unit difference in price leads to a 5% change in market share.
1. Write down Pepsi's profit equation for next year as a function of marginal cost, market size, market share today, their own price, Coke's price, and x. Use the numerical estimates where possible. Please use the letter π to represent profit, the letter p to represent prices, subscript f to refer to Pepsi and subscript i to refer to Coke.
2. Write down Coke's profit equation for next year as a function of marginal cost, market size, market share today, their own price, Pepsi's price, and x.
Additional information Total market size is 1 million equivalent units.
Coke | Pepsi | |
Marginal cost per unit (dollars) | 70 | 60 |
Market share | 60% | 40% |
Economics of Strategy
ISBN: 978-1118319185
6th edition
Authors: David Besanko, David Dranove, Mark Shanley, Scott Schaefer