Market_Substitution_in_Soft_Drink_Industry

Market substitution in Soft Drink Industry   Soft drinks are found in almost every schools’ and businesses’ cafeteria, stores and even gas stations. There are hundreds of different kinds of flavor in soft drinks to satisfy different type of customers. There are the caffeinated ones for those who needed the boost in their day or the diet version for those who are healthier in conscious. Given that soft drink manufacturers are operating in a Pure Competition market structure, generally it is unlikely that a single company would be able to influence the market price of the soft drinks. With the lot of substitutes available in the soft drink industry, a macro economist would think that the price elasticity of demand would relatively be elastic. Traditionally the more and closer the substitutes available for a type of product, the higher the elasticity is likely to be, as people can easily switch from one product to another of a similar one. Customers may argue that some substitutes would taste similar or better than the originals. For example Coke has Pepsi as a direct competitor to their Cola line however; there are other off-brand names that are available in the cola-flavored soft drink substitution. For such reason big soft drink companies have spent endless resources in their marketing department to emphasis on advertising, brand names and trademarks. Such emphasis would create a product differentiation in between their line of soft drinks and the competitors. Market differentiation plays a great part in causing price elasticity of demand to be relatively inelastic. When a customer wants a soft drink they would request the product by the name of the brand such as 7up, Coca-Cola, Dr. Pepper, etc. “I would like a glass of Mountain Dew with ice” or “I want a can of Sprite” are some examples that customer would say when they are ordering the type of soft drinks at the stores and restaurants. The perfect results for such marketing plan would shift their products from a Pure Competition to a Monopolistic Competition market causing their product’s price to be inelastic. Successful companies in a Monopolistic Competition market has slight control over their product price hence increasing their overall marginal revenue. One of the soft drink companies’ limitations over their price control is current market price. If the market price for 1 Liter bottle of soft drinks is $2.00, their differentiation would only allows them to go higher over a certain percentage on top of the market price. If the product is priced too high customer will begin to look into substitutions in which then lead to a shrinking profit. To enhance some of the soft drink companies’ brilliant marketing plans I would recommend the addition of greater efforts in product placements as well as associating a sense of new atmosphere of where the products are being sold. An attachment to a certain brand can override customers’ second thoughts over a higher price change. Starbucks have their loyal customers to follow their brand, and they’re able to charge a $.50 cup of coffee for $5.00. It’ll be soon enough before customers are paying few dollars more for a glass of soft drink.   Reference: Mc Connell, C. R., Brue, S.L., & Flenn, S.M. (2009). Economics: Principles, problems an policies (18th ed.). Chapter 8, 9, 12 & 13