About Coca Cola Company

Coca-Cola Company specializes in the soft drink sector, with the highest market share. The company’s excellent marketing campaign has allowed it to maintain a competitive advantage and be the market’s dominant seller. The group has built itself in foreign markets, which has been a key source of the company’s massive earnings. Coca-Cola faces strong competition in this industry from other companies, especially Pepsi, which affects the demand and supply of its product. However, the company’s heavy investments on research and development together with carrying out massive advertisement has proven to be a strength for the company in outsmarting the competitors. The company’s well-established brand as well as the huge market share creates barriers to entry for potential firms. The company operates in an oligopolistic market structure where the game theory phenomenon is employed in making decisions in a firm. The paper will use demand and supply curves together with the kinked demand curve in the analysis.

Keywords: Coca Cola, Demand, Supply, Market share, kinked demand curve

Coca Cola Microeconomic Analysis

Introduction

Coca Cola is also called “coke” and it is a bicarbonate soft drink that is distributed globally distributed by the Coca Cola Company. This paper will analyze the microeconomic factors of Coca Cola Company. The paper will begin by analyzing the demand and supply conditions of the company. Under this, there will be an evaluation of demand over time and discuss the factors that influence the demand and supply of the coke. The price elasticity of demand for the product will also be analyzed, and this will be done using the kinked demand curve. This is because Coca Cola Company operates in an oligopolistic market where the demand for a product is explained by the kinked demand curve. The cost of production and the overall market analysis for the company will also be analyzed. The cost of production will involve analysis of both direct and indirect costs that the firm incurs in its production process. The overall market analysis will include analysis of market structure and the market share of the component. After an in-depth analysis of the company, recommendations will be provided on the changes that could be made to realize more success.

History of the Company

Coca Cola Company is a registered trade mark since its establishment on March 27, 1944. Initially, the coca cola company was established by pharmacist John Pemberton as a medicine producing company in 1884. In 1889, the company was bought by a businessman, Asa Griggs Candler who employed his magnificent strategic marketing tactics in the company (Wang, 2015). Through this, he managed to make coca cola company become dominant in the world market of soft drink in the entire 20th century. Due to the scarceness of economic resources, the company has devised ways of production efficiency in an aim to generate the greatest benefit from the limited resources. The efficient global marketing system has seen the company dominates in the market.

Demand and Supply Analysis

The law of demand states that the price and the quantity demanded have an inverse relationship. An increase in the price leads to a reduction in the quantity demand. The demand for coca cola product follows this rule. When the price of the product increases, the demand decreases and with the price decrease, the demand increases. Trends in demand for the coca cola company have been impressive depicting an increase in the demand of its product for the past 10 years. This is majorly attributed to the huge advertisement carried out by the company. The company has taken positive steps in its operations to realize the best market share along with registering improvement in its demand. The coca cola company has also shifted its focus on smaller format packaging that are sold in high priced markets for increase revenue. The equilibrium market for co cola company product is denoted by the following graph.

Price

Supply

P

Output

The profit maximizing level for the company is determined through forces of demand and supply. The coca cola company is willing to sell more of its product to the market when the prices of the product rise. On the other hand, the consumers of the product will be willing to buy more of coke at a point where the prices decrease. Therefore, the forces of demand and supply lead to equilibrium level in the market with a given value of price and quantity at points P and Q respectively.an increase the coke price decreases the demand. a decrease the market prices has an effect on the demand and the supply of the coke product. This will result in movement along the demand and the supply curves. The graph denotes the movements as a result of price increase in coke.

Supply

P0

P1

Demand

Q1Q0Q2 Product

Before the price increase, the market is at equilibrium with quantity Q0 and price P0. Price increase leads to changes in the equilibrium quality demanded by the consumers and the quantity supplied by the company. The reduction discourages the coke company from selling more and thus it will contract its supply in the market reducing the quantity supplied from Q0 to Q1. The reduced prices will result in low revenue and even risk the company in making losses. On the other hand, the reduced price encourages the consumers to buy more of the coke product. Hence, the quantity demanded will increase from Q0 to Q2. The forces of demand and supply will create a new equilibrium level in the market industry.

There are various factors that affect the demand for coca cola product and availability of close substitutes such as Pepsi is one of the factor. Changes in the demand of the close substitutes for example, Pepsi changes the demand for the coca cola product. It follows that, changes in the price of the related good leads to changes in the demand of the product due to substitution effect of the consumers. If sepsis reduces its prices, the demand for coca cola product will be reduced. This is because the consumers will buy Pepsi that turns out to be relatively cheaper. Pepsi is the greatest competitor to the coke company. Changes in the income of the consumers is also a major factor that affects the demand for the coke product. If the income increases, the consumer will have more disposable income and thus buy more of the product. However, a decrease in the income of the consumer reduces the demand for the product. The taste and preferences of the consumer have an impact of either increasing or decreasing the demand of the product (Jackson et al., 2008). If the consumers have no tastes and preferences for coca cola product, an increase in the prices could make the consumer decrease its demand by substituting it with another product. Wanga stipulate that “Coca-Cola contains harmful levels of aspartame, pesticides and other chemicals” which raise health concerns of the consumers (Wang, 2015). These differences in the tastes could make the consumers to opt in taking more natural drinks and thus decreasing the demand. Time also has a great impact on the demand for the product. The demand of the product goes up during the festive seasons and goes down at other times.

Additionally, changes in the population and demography has an influence on the demand for the product. Population increase makes the company sell more products and thus increasing the demand. Also, future expectations in the price increase will make the consumer to buy more of the product now and thus lead to an increase in the demand. On the other hand, if the price of coke product is expected to decrease in future, the demand will decrease as people know that they will be able to buy the product at a lower price in future and thus save.

The supply of the coke product depends on the input costs, the technological improvement, the price of the substitutes, and the number of firms in the market together with the future expectation in the price of the product. It the seller expects the product to increase in future, the company will reduce the supply now in order to make more profits in future. An industry characterized by many firms the supply is reduced due to high number of competitors. Close substitutes also decrease the supply and an increase in the price of the inputs decreases the supply.

Price elasticity of demand

The price elasticity of demand refers to the degree of responsiveness of the quantity demanded to the changes in the price of a product. Coke is a normal good and thus depicts elastic demand. Here, a unit change in the price of the product has a more that one unit impact on the demand for the product. Passage of time, availability of close substitutes, and share of budget affect the elastic o demand. Besides, the elasticity of demand will depend whether the product is a necessity for a luxury. For a luxury product, the demand curve is inelastic while for necessity product the demand curve is elastic. The graph below shows the kinked demand curve of the company.

Price

Section A

Section B

Output

Coca Cola is characterized by kinked demand curve. In section A, a rise in the price of the coke product could make many customers switch to relatively lower priced soft drink. The substitution effect makes the demand in this area to be relatively elastic above the kink. Therefore, the coca cola firm could lose its maker share at this point. On the other hand, in section B, decreases in the price of coca cola will also prompt the other seller to decrease the prices. The cut in the prices could switch the customers from not buying coke. The demand is relatively in elastic at this point because the decrease in the price will not be proportional to the increase in demand. This is because the other consumers will shift into buying the other product that has also decreased in price.

Cost of production

The company incurs direct and indirect costs of production. The direct costs of production include costs of raw material, labor costs, the administration expenses, and cost of depreciation. The direct costs are divided into variable costs and fixed costs. Fixed costs are those costs m which do not vary with variations in the output level. An example includes rental cost. On the other hand, the variable costs of the company vary with variations in the amount of output, and this includes costs of raw materials, the labor cost and the cost of procurement. Coca Cola Company also involves inventory evaluations to determine its costs in purchasing. Tax is another direct cost that the company incurs. The indirect costs are the costs of production that do not have a direct impact on the production process of Coca Cola Company. For example, Coca Cola Company incurs training costs as an indirect cost. Furthermore, the cost of advertisement is another indirect cost that is heavily incurred by company. Advertisement is a sunk cost in which as the company spends more money on the advertisement it more it deters possible entrants.

The trends in the costs of production for coca Coal Company have been steadily increasing with an increase the output level of production. The increase in the sugar prices has also seen the rise in the cost of production. Sugar is one of the major ingredients in the production of coke, and thus a rise in its price has a direct impact in increasing its cost of production. Over the years, the company has been registering an increase in its production costs due to the increase level of output. The cost of production has an impact on the amount of revenue made by the company. When the cost of production id is high, the level of profits reduce. However, the company has devised cutting on it production costs, and this includes reduction of the cost of labor and heavy investment into technology. Also, the company underwent restructuring program that also led to efficiency and resulted in a decrease in the cost of production. These moves to cut on the costs of production has a significant role on increasing the level of profit for the company. The company also significant spend billions of money on advertisement through the television, radio, print and worldwide internet. The huge investment into the advertisement has greatly lead to increased level of sales in the company.

Profit Maximizing Price and Output for the Company

Coca Cola Company operates in an oligopoly market structure. Under this market, competition is found through having production efficiency and thus producing a product at a minimum value of average total cost. The company in this market structure strive to achieve allocation efficiency. They produce to a point where the marginal cost is equal to the value of the marginal revenue. However, the aspect of producing to maximum profits happens at a point where the marginal revenue is equal to the marginal cost (Wanga, 2015). Notably, intersection of the total average revenue curve, marginal cost curve and and the marginal revenue curve of coke Company attains an efficient scale of production at the minimum average total cost. This is indicated in the graph below.

Revenue

Cost

Price

Marginal Cost (MC)

P2ATC

P1

Marginal Revenue (MR)Market Demand (D)

QQuantity

The graph depicts the long run equilibrium level of Coca Cola Company. The equilibrium level is found through producing an output level of Q and at a price level of P1. At this point, the company has normal profits. However, the Coca cola Company operates in an oligopoly market and it will charge a price of P2 in the market and result in the creation of abnormal profits. “In the long run equilibrium level, the marginal cost has to be rising, and it should be above the marginal revenue” (Wanga, 2015). The price level P2 is the maximizing profit level of price for coca cola and Q is the quality level of output that maximizes the profit level.

Market structure

According to a report released by The Coca Cola Company (2017), the soft drink industry is particularly dominated by two major companies which are PepsiCo and the Coca cola Company. The market structure is oligopoly which is characterized by few firms that sell the homogenous product. The market also has high barriers to entry. The seller thus has influence over the market prices, and they can affect prices through limiting the product produced to create shortages. For a firm in this market to make decisions and actions, it has to consider the actions of the other competitors to arrive at an optimal choice strategy. This results in game theory which is a standard feature of the oligopoly market that helps the firms to maintain market share. The firms produce an identical product. Due to the production of the similar product, the players “tend to be wary of each other as rivals and the prices are held back to some extent for fear of losing the market share” (The Coca Cola Company, 2017).

The producers in this industry are interdependent, and firms face barriers of entry arising from high cost incurred to enter the market. The firms in this market are dependent on each other before they make any economic decision. It is thus characterized by kinked demand curve and game theory which guides the decisions of the firm basing on the decision made by the other firm. The high carrier of them market structure has made the coca cola company to maintain its dominance in the market. The company also enjoys economies of large scale. The more advertisement made by the company has enabled it to take a wide market share globally. This move significantly encouraged the company to grow rapidly in the 20th century and achieved economies of scale. The increased scale of production. The company has a long history of heavy advertisement which has certainly earned it a strong brand and managed to attain loyalty of customers. This has visually made it difficult for either form to enter the market.

Market share

Coca Cola is the dominant producer of soft drink and, enjoys the largest market share followed by Pepsi co. In 2015, the coca cola company reported better profits which were facilitated by the aggressive cut in the costs of production along with lower commodity costs. However, in 2016, the revenue of the company fell, by 8%. The shares of the company in 2016 rose by 1% to $43.02 million (The Coca Cola Company, 2017). The company is targeting an annual sale of $3 billion by 2019 and it has initiated cost cutting factors through selling of bottling operations and factories along with reductions in the labor costs. The move to franchise its bottling operations in the North America is targeted at reducing the capital gains together with providing a boost to the margins and returns of the company. In 2016, the global sale of the company on global scale rose by 3% which also increased its global market share. Similarly, the company is involving itself in the expansion of smaller-packaged strategy globally in order to make more sales by reaching its buyers. In the last quarter of 2016, the net operating revenue for the company was $10 billion, and this was attributed to the strong dollar. However, in the first quarter of 2017, its revenue decreased to $9.9 billion due to the impact of acquisitions, foreign currency, and divestitures.

Recommendations

Analysis of the demand and supply trends reveals that the company has to enact measures that will enable it to continue enjoying dominance in the market. Due to the high competition faced from another firm in the market particularly Pepsi, the firm is at risk of losing its dominance if it does not enact measures to shield the company. Coca Cola has to concentrate more on customer feedback to get the views of the customers and incorporated them into its strategic actions. Besides, it has to embrace an excellent customer service and build more on customer loyalty. in quest of keeping the market position; the firm has to identify new markets and target new customers. It should also have offers for its customers and aim at establishing a customer-centered strategy. This will not only help the firm in increasing its market share but also maintain the success of the firm. Customer consciousness has on the ingredients of the product raises health concerns in people. Therefore, the company should carry out product differentiation and manufacture products that are free of the chemical components to target the entire market and sustain its demand elasticity.

References

Jackson, J., Mclver, R. and Wilson, E. (2008), Microeconomics. 9th ed. Australia: McGraw-Hill.

The Coca Cola Company. (2017). The Coca-Cola Company Reports First Quarter 2017 Results. Press Center. http://www.coca-colacompany.com/press-center/press-releases/the-coca-cola-company-reports-first-quarter-2017-results

Wang, M. (2015). Brief Analysis of Sports Marketing Strategy Adopted by Coca Cola Company. Asian Social Science, 11(23). http://dx.doi.org/10.5539/ass.v11n23p22