Question

You will see that I'm asking you to think of yourself as president of the Pepsi Corporation. The key in the following situations is to determine what to do with the price of Pepsi based on your understand of price elasticity of demand.  So, read each of these scenarios one by one and based on the information given decide if you want to raise, lower or leave the price of Pepsi the same. You don't have to be specific as to the amount you want to raise or lower the price, just choose which option to implement is acceptable. Please point to specific reasons stated within the paragraphs that influenced your decisions. For example, in the first quarter you learn that the economy is predicted to grow. So tell me how that piece of information influenced your decision about your pricing strategy. I would think you would need to write a paragraph or two in response to each of the four following scenarios. Think of each of these situations as being tied to the four quarters of the calendar. Thus, the first quarter of this assignment begins on January first. Please remember that with each new quarter you can forget what happened on the last quarter and start fresh with a new set of information.  

1. 
   Congratulations! You are the president of Pepsi Cola Company. Today you are being asked to decide what pricing strategies to implement for the first quarter of the new year. Here are the things that you know. Coca-Cola and Pepsi had almost identical sales in the last quarter of the last year. Throughout the year, prices of both companies were very stable (they didn't raise or lower much) and prices were almost similar in the market place. Both companies realized increased sales for the previous year and both companies had higher earnings for the year. Company economic advisors have told you that all signs point to continued growth in the overall U.S. economy during the first quarter. You have approved an increase in the amount of money that the Marketing Department can spend this year. Today you were told that the price of your products in the grocery stores is the same. Now decide, will you raise your price, lower your price or keep your price the same for the first quarter of the year? In each situation explain what you expect to see happen to sales and thus your profits.
   
   2. It's now time to implement a pricing strategy for the second quarter of the year. The economy is predicted to level off. No growth will be realized in the U.S: this quarter however no loss will probably occur either. Coca-Cola has just lowered its price and is now less expensive than you. As a matter of fact, it's now priced at half of what Pepsi is priced at. Your customers have a very high price elasticity of demand. You spent very little of the big pool of marketing money during the first quarter. Good news from the European countries has arrived. New plants have begun operating and the demand for Pepsi in that part of the world remains high.  Will you raise your price, lower your price, or leave your price the same? Please explain your choice.
   
   3.    It’s hard to believe that the year is half over. I hope that you've made some money so far. It looks as though hard times are here. Unemployment is skyrocketing. The European nations are also suffering a downturn in their economies. The 7-up company has dropped its' prices through the floor and they've spent millions letting the public know that fact. Coca-Cola has got those Polar Bears dancing and singing. They are promoting another new Coca-Cola product. Interestingly enough, they have left the price of their original Coke the same for this quarter. Their new product is priced the same as the original Coke: Will you raise prices, lower prices, or leave your price the same? Keep in mind that Coca-Cola customers will also have a very high price elasticity of demand.
   
   4.   We're heading down the home stretch. Finally, the economy has just taken off!

All the signs point to a strong finish to this year. The board of directors is looking to you to find a way to go out with a bang. Europe is also seeing their economy improve. Believe it or not, the new product introduced by Coca-Cola just bombed. It gave everyone gas. People were making noises that just can't be described. Not only did people quit buying the new Coke, but also sales of the old Coke dropped. Coke has taken the new product off the market and has left the price the same that it was in the last quarter for its' original Coke product. 7-Up no longer wants to slug it out with you and coke. They have raised their price and have curtailed the extra advertising that had gone on. What will you do, raise lower or keep your price the same?

Answer 1

1) Scenario 1 - Economy will continue to grow and company has to compete with a product which is nearly perfect substitute of Pepsi where cross elasticity of demand is very high . A small change in high price of pepsi will switch demand to coke as they are competitively substitute products so company can decrease the price marginally and not much as people have spending power to purchase . considering the competitor's strategy in mind and spend more money in promotion of the products by giving volume discounts , gifts to attract more consumers . Since cross elasticity of demand is high so small decrease in price will bring 90% customers from Coke to Pepsi .

2) Scenario 2 - Since coke is already providing product in lesser price so now the strategy should be to manufacture in European plants where demand is high and get economies of scale by more production and lesser per unit cost .The same product can be imported in US in much competitive prices . Since price elasticity of demand is high so a small lowering of further price will switch the demand to pepsi from coke 90% .

3) Scenario 3- In a economy which is sluggish , the best strategy is to lower the price in order to gain market share from closed substitute . Since 7 up has already lowered the price and coke is maintaining same price so pepsi should lower the price further in order to win major market share .

4) Since brand image of coke is not good at this moment due to NPI failure so its best to raise the high from original price but not higher than 7 up . As now 7 up is only competitor and Pepsi can encash on this pricing strategy of market skimming and take major profit from market by encashing this opportunity