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Basic Supply Chain and Strategy: Shanti Business School

This document presents a game theory case study of Pepsi and Coca-Cola's competitive strategies. It contains two payoff matrices (tables a and b) that show the profits for each company given different advertising strategy combinations. In table a, the dominant strategy for both Pepsi and Coca-Cola is to advertise, as it yields the highest profit regardless of the opponent's choice. The Nash equilibrium is for both companies to advertise, as neither would benefit from deviating from this strategy alone. In table b, the Nash equilibrium is for both to choose an aggressive advertising strategy, though this is not collectively optimal for profits.

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Jay Sharma
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697 views6 pages

Basic Supply Chain and Strategy: Shanti Business School

This document presents a game theory case study of Pepsi and Coca-Cola's competitive strategies. It contains two payoff matrices (tables a and b) that show the profits for each company given different advertising strategy combinations. In table a, the dominant strategy for both Pepsi and Coca-Cola is to advertise, as it yields the highest profit regardless of the opponent's choice. The Nash equilibrium is for both companies to advertise, as neither would benefit from deviating from this strategy alone. In table b, the Nash equilibrium is for both to choose an aggressive advertising strategy, though this is not collectively optimal for profits.

Uploaded by

Jay Sharma
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Game Theory Case Study (Pepsi & Coca-Cola)

Basic Supply Chain and Strategy

Case Study on Game Theory –


Pepsi & Coca-Cola

Shanti Business School

Name Roll No.


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Game Theory Case Study (Pepsi & Coca-Cola)

Table of Contents
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Chapters Page No.


1 Case Study
2 Analysis
Game Theory Case Study (Pepsi & Coca-Cola)

Chapter 1
Case Study

Pepsi & Coca-Cola are one of the top leading soft drink brands. This case for Pepsi &
Coca-Cola is of pay-off matrix. In which three of elements are categorized in the form
of the Players, Strategies which are available to the players and the payoffs each
player received. In a Table (a) where first number in a square (Horizontally) refers to
Pepsi & second number in a square (Vertically) refers to Coca-Cola. All these
numbers represent the profit for Pepsi & Coca Cola in which one of the player’s gains
a lot by advertising and another player does not advertise as one advertiser already
gains a huge market share. In a Table (b) Each Company deciding whether to go for
an Aggressive strategy or a Restrained Strategy. In Aggressive Strategy each
company will increases its spending on Billboards and Media Adverting over equals
to last year spending and in Restrained Strategy in which company’s spending would
be equal to the last year spending. The Profits are represented in a table.

(a)
Coca Cola
Advertise Don’t Advertise
Advertise 70, 70 115, 40
Pepsi Don’t Advertise 40, 115 90, 90

(b)
Pepsi
Aggressive Restrained
Aggressive $90, $70 $160, $30
Coca Cola Restrained $80, $130 $110, $90

Find the Dominant Strategy in this game and What is the Nash Equilibrium in this
case study?
Game Theory Case Study (Pepsi & Coca-Cola)

Chapter 2
Analysis

Sol.: Three Basic Elements are in this Case study:

a) The Players: The Players are Pepsi & Coke.

b) The Strategies: The Strategies available to each player:


In Table (a)
Pepsi as the row player who can either choose advertise or don’t advertise.
Coca-Cola as the Column player who can either choose advertise or don’t
advertise.
In Table (b)
Coca-Cola as the row player who can either choose Aggressive or Restrained.
Pepsi as the Column player who can either choose Aggressive or Restrained.

c) The Payoffs each player receives:


In Table (a)
 If Pepsi Choses Advertise and Coca-Cola Chooses Advertise, Pepsi
Earns 70 and Coca-Cola Earns 70.
 If Pepsi Choses Advertise and Coca-Cola Chooses Don’t Advertise,
Pepsi Earns 115 and Coca-Cola Earns 40.
 If Pepsi Choses Don’t Advertise and Coca-Cola Chooses Advertise,
Pepsi Earns 40 and Coca-Cola Earns 115.
 If Pepsi Choses Don’t Advertise and Coca-Cola Chooses Don’t
Advertise, Pepsi Earns 90 and Coca-Cola Earns 90.

In Table (b)
 If Coca-Cola Choses Aggressive and Pepsi Chooses Aggressive, Coca-
Cola Earns 90 and Pepsi Earns 70.
 If Coca-Cola Choses Aggressive and Pepsi Chooses Restrained, Coca-
Cola Earns 160 and Pepsi Earns 30.
Game Theory Case Study (Pepsi & Coca-Cola)

 If Coca-Cola Choses Restrained and Pepsi Chooses Aggressive, Coca-


Cola Earns 80 and Pepsi Earns 130.
 If Coca-Cola Choses Restrained and Pepsi Chooses Restrained, Coca-
Cola Earns 110 and Pepsi Earns 90.

In the table (a)

Dominant Strategy:
Dominant Strategy is the best strategy for one player regardless of the strategy the
other player follows.
Dominant Strategy for Pepsi is to choose Advertise as Pepsi Earns more regardless
than the Coca-Cola’s strategy chooses.
1) If Coca-Cola chooses advertise then Pepsi earns 70 which is greater then
earning 40 from choosing don’t advertise.
2) If Coca-Cola Chooses don’t advertise then Pepsi earns 115 which is greater
than earning 90 from choosing don’t advertise.

Dominant Strategy for Coca-Cola is to choose Advertise as Coca-Cola earn more


regardless than the Pepsi strategy chooses.
1) If Pepsi chooses advertise then Coca-Cola earns 70 which is greater than
earning 40 from choosing don’t advertise.
2) If Pepsi Chooses don’t advertise then Coca-Cola earns 115 which is greater
than earning 90 from choosing don’t advertise.

Nash Equilibrium:
In this Game, Nash Equilibrium is Pepsi choosing Advertise and Coca-Cola Choosing
Advertise. So, both the players choose the same strategy. But in a Nash Equilibrium
player’s do not have to choose the same strategy.
If Coca-Cola Chooses Advertise then the Pepsi is always better to choose advertise
(70 compared with 40). If Pepsi chooses don’t advertise the Coca-Cola is always
better to choose advertise (115 compared with 90). Vice Versa.
Thus, Nash Equilibrium is an “Enforceable” equilibrium because firms don not have
incentive to cheat as they might in a cartel.
Game Theory Case Study (Pepsi & Coca-Cola)

Similarly in the Table (b)

Dominant Strategy:
In this game, Both the players have a dominant strategy that does not maximize the
payoff (Collective) of the players in the game. If Restrained Strategy is chosen by
both of the players, then both of the players can easily increase the profit and Payoffs
(Collective) would be maximized.

Nash Equilibrium:
The Nash Equilibrium is that both firms choose Aggressive ($90, $70)
Thus, Nash Equilibrium occurs when one of the players chooses a strategy that gives
the highest pay off, given strategy chosen by other players.

Thank you

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