Question

The manufacturers of R.C. Cola, with 2.1% market share in the soft drink industry, recently launched a new advertising campaign describing their brand as a "hip alternative" to "corporate colas" like Coke and Pepsi. Why don’t they simply try and gain market share by cutting price? What property of oligopoly markets explains this type of behavior?

150 WORDS PLEASE

Answer 1

The reduction in price to gain the market share is not a good strategy as the reduction in price by the manufacturer of R.C. Cola will be followed by the reduction in prices by Coke and Pepsi. So, market share will remain in the same status, but total revenue earned by the firms will come down. If the price is increased by the R.C. Cola, then other firms will remain at the old price level and R.C Cola will further get the decrease in market share. So it is the quality of the products and tapping the untapped market that leads to the increase in market share of the R.C. Cola.
Such behavior of the market is called sticky price theory or Kinked demand theory in the oligopoly where firms decrease the price if one player decrease the price, but nobody follows when one player increases the price. So, price remains sticky in nature in the oligopoly market.