Was given the following problem to answer. I believe #c is the correct answer bu

Question

Was given the following problem to answer. I believe #c is the correct answer but wanted a second opinion.

In a recent 'earnings call,' a teleconference call to shareholders in which the CEO reports and discusses quarterly earnings per share, Coca-Cola's CEO Muhtar Kent bragged about 'winning' market share from rival beverage company PepsiCo. However, rising sugar costs in 2011 are forcing Coke to raise soft drink prices by 3 to 4 percent, and this could undermine Coke's market share gains if Pepsi does not also raise its soft drink prices. The Wall Street Journal (April 27, 2011) reports that, in an effort to continue 'winning the market share battle,' Kent plans to maintain relatively low prices in soft drinks by raising prices disproportionately higher in other categories such as fruit juices and sport drinks. The WSJ raises the concern that 'winning market share may come at too great a financial cost.'"

Which of the following is a reason why Kent's suggestion is not a wise decision for Coke?

Select one:

a. Kent should ignore the change in Coke's costs (due to the rising sugar prices) and just match any price change of Pepsi, even potentially keeping prices the same if Pepsi doesn't change its prices. Since the products are such close substitutes, Coke will maximize its profits by keeping its price as close as possible to Pepsi, regardless of its own costs.

b. Kent is choosing to raise prices in juices/sport drinks when he should be pursuing low prices in all beverage categories. The company will maximize its profit by gaining market share in both soft drinks and juices/sport drinks.

c. The pursuit of market share neglects the MR = MC rule for pricing, so Coke would not be maximizing its total profit under such a strategy.

d. Since the beverages are such close substitutes, and since rising sugar costs are pushing up prices of soft drinks, Kent should also raise prices of juices/sport drinks, not lower them. The rising costs in one drink category should lead to increased prices in all drink categories if Coke wants to maximize its profit.

Explanation / Answer

I totally agree with you. The fundamental law of profit maximisation states that the marginal revenue from a product should equal its marginal cost. but studying both the products i.e coke and other beverages owned by coca-.cola company. we see that in their first product coke they are not increasing the prices as the costs rises so the marginal costs exceeds marginal revenue. and hence profit can be maximised bedecreased by decreasing its production quantity.

In case of other beverages like sports drink and all, increasing prices will result in decrease in sales because of law of demand. this will lead to a situation where MR>MC. so even in this case profits of firm can be increased by increasing the production of other beverages.

So the rise in price of other products is not compensating the loss from coke. so this is not a profit maximisation situation. Hence Kent should not consider implementing that policy.

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