South-Western College Publishing - Economics  
Is It "Always Coca-Cola?" Coca-Cola Tries To Ensure It Is.
Subject Advertising
Topic Monopolistic competition
Key Words Prices, profit, volume, consumers, money, unique features, ads
News Story

Coke is in the midst of raising its prices. Like Pepsi, it is hoping that profit will increase even if volume decreases. Much depends on whether consumers switch from coca-cola to other soft drinks such as teas, fruit drinks, sports beverages, and water.

It is therefore willing to spend more money on advertising to retain customers. It is replacing its slogan of "Always Coca-Cola" with "Coca-Cola Enjoy." The campaign highlights the unique features of Coke, such as the flavor, the spice, the aroma, and the bottle. The intent is to stress the usefulness of coke in refreshing consumers and in creating fun and good times. Consequently, the ads feature bubbles and fizzing energy. Some also recall good times in days gone by. The jingle is catchy, and is played in at least 19 musical genres from urban/Latino/rap to country/traditional.

(Updated March 1, 2000)

Questions
1. How do you know that the soft drink market approximates monopolistic competition? Refer to the assumptions of monopolistic competition.
2. Draw the profit-maximizing equilibrium of Coca-Cola assuming that it is a monopolistically competitive firm in the market for soft drinks. Be sure to draw the demand and marginal revenue curves and the average total and marginal cost curves.
  a) If Coca-Cola wishes to raise prices and earn more profit, what must happen to demand? Draw the new demand curve on your diagram, and show how price and profit can rise.
  b) What happens if advertising costs increase?
  c) What are the implications for Coca-Cola if it wishes to raise its profit?
3. How will the advertising campaign help Coca-Cola to move its demand curve in the desired direction? Refer to the content of the campaign and the determinants of the demand for coke.
Source Stuart Elliott and Constance L. Hays, "Advertising: A revamped pitch for Coke will pave the way for higher prices," The New York Times, January 13, 2000.

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