Question

CASE #1: COCA COLA

The Coca-Cola company started 110 years ago as a small, insignificant one man business. Since then, it has grown into one of the largest companies in the world. The first chairman of the company was Dr. John Pemberton and the current chairman is Muhtar Kent. The demand for this product has made this company into a 50 billion dollar business.

Coca-Cola was invented by Dr. John Pemberton, an Atlanta pharmacist. He concocted the formula in a three legged brass kettle in his backyard on May 8, 1886 by mixing lime, cinnamon, coca leaves, and the seeds of a Brazilian shrub. (Things Go Better With Coke 14). Coca-Cola, as he called the beverage, made its debut in Atlanta's largest pharmacy, Jacob's Pharmacy, as a five cent non- carbonated drink. Later on, the carbonated water was added to the syrup to make the beverage that we know today.

Coca-Cola was named by Frank Robinson, one of Pemberton's close friends. Pemberton, in a state of poor health and in debt, was forced to sell a portion of the company to Asa Candler. In time, Candler acquired the whole company for $2,300.

Candler achieved a lot during his time as owner of the company. On January 31,

1893, the famous Coca-Cola formula was patented. He aggressively advertised Coca-Cola in newspapers and on billboards. In the newspapers, he would give away coupons for a free Coke at any fountain. Coca-Cola was sold to Ernest Woodruff in 1919 for 25 million dollars. He gave control of Coca-Cola to his son, Robert Woodruff, who would be president for six decades.

Woodruff introduced the six bottle carton in 1923. He also made Coca-Cola available through vending machines in 1929. That same year, the iconic Coca- Cola bell glass was made available. He started advertising on the radio in the 1930s and on television in 1950.

Currently Coca-Cola is advertised on over five hundred TV channels around the world. Often considered the best known trademark in the world, Coca-Cola is sold in about one hundred and forty countries to 5.8 billion people in eighty different languages. This is why Coca-Cola is the largest soft drink company in the world. Coca-Cola is worth more than 58 billion dollars on the stock market (Coca-Cola, The Coca-Cola Company 232).

For more than 65 years, Coca-Cola has been a sponsor of the Olympics. One way to see all of the achievements of the Coca- Cola company is to visit the World of Coke in Atlanta. It houses a collection of memorabilia, samples of the products, exhibits, and many other interesting items.

Cost of production of coke is very low because it is nothing but water mixed with some sweetener and color. Demand for coke is growing. Rich and poor, young and old, everyone likes Coca Cola.  

CASE #2: EXXON MOBIL CORPORATION

Over the last 125 years ExxonMobil has evolved from a regional marketer of kerosene in the U.S. to the largest publicly traded petroleum and petrochemical enterprise in the world. Today it operates in most of the world's countries and is best known by the familiar brand names: Exxon, Esso and Mobil. The company makes the products that drive modern transportation, power cities, lubricate industry and provide petrochemical building blocks that lead to thousands of consumer goods.

Exxon Mobil Corporation engages in the exploration and production of crude oil and natural gas, and manufacturing of petroleum products, as well as transportation and sale of crude oil, natural gas, and petroleum products. The company manufactures and markets petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics, and other specialty products. It also has interests in electric power generation facilities.

As of December 31, 2011, the company operated 37,692 gross and 31,683 net operated wells. Exxon Mobil Corporation has a strategic agreement with the Rosneft Oil Company for investment into oil and gas fields in the Russian

Federation. The company has operations in the United States, Canada, South America, Europe, Africa, Asia, and Australia/Oceania. Exxon Mobil Corporation was incorporated in 1882 and is based in Irving, Texas.

Finding, drilling, refining, shipping and selling to customers all contribute to the cost of gasoline. It is costly to produce and supply.

Gasoline is the main product that Exxon Mobil markets throughout the world, and is very important for the modern world. In addition to being used by cars, trucks, tractors, ships, planes, and many other vehicles, it is also used to run many mills and factories, and in many power plants to generate electricity. We know that we have limited supplies of oil and one day we shall run out of the gasoline derived from it. Yet, we pay roughly the same price for a liter of gasoline as we pay for a liter of coca cola.

As far as demand for petrol goes, most of the petrol is used to run cars. In order to own and run a car there are some restrictions. A driver has to be an adult and must have a driving license. Petrol is also sold from specially designed petrol pumps which are costly to build and operate. In contrast, Coke is sold everywhere and can be bought by anyone. One does not have to be an adult or owner of a car to buy coke.

Comparative Questions

What kind of industry do these two companies belong to: Perfect Competition, Monopolistic Competition, or Oligopoly? Explain your answer and substantiate why it might influence your decision-making.

What is the cross price elasticity of demand between Coke and Pepsi? Between Exxon gas and Shell gas?

What is the Cross Price Elasticity between Coke and Exxon gasoline?

Which company has higher fixed costs? Which has higher marketing costs? Why does Coke advertise all the time but Exxon Mobil hardly ever?

What other issues with regards to the social, political, labour, or environmental practices of these two companies might you include that could impact your decision?

Answer 1

These two companies belong to Monopolistic Competition. Both of these companies work in their respective industries/market, but sell differentiated products.

The cross price elasticity of demand between coke and pepsi is positive, because these two are substitute goods with high cross price elasticity of demand. Similarly, Exxon gas and shell gas also has positive cross price elasticity of demand.

The cross price elasticity between Coke and Exxon gasoline will be zero because these are unrelated products.

Exxon Mobil Corporation has higher fixed cost. Coke has higher marketing cost. The demand for Exxon mobil is much higher as compared to coke. Hence Coke advertise all the time but Exxon mobil hardly ever.

The issues such as health concerns due to consumption of coke, labour demand by both the companies, political restriction etc has a major influence in the decision.