Economic Analysis of Market

Economic Analysis of Market
When a firm intends to enter a market it is important to make an analysis of the market conditions, the structure of the market, the competitive elements, the demand situation along with the elasticity of demand, the possible market power that can be created in the market and so on. In this paper we consider the entry into the market for non-alcoholic cold beverage section that produces aerated drinks such as the Coke and the Pepsi.
Let us begin with the market structure. We can find that though the manufacture of cold beverage does not involve very high initial cost and the demand is also quite high, yet the market has taken an oligopolistic structure. There are only two major firms (Bailey, 2014). The products that the firms offer are somewhat homogeneous in nature. So it is not a differentiated oligopoly. Initially a kind of price war existed between these two companies who offered heavy discounts and gifts on their products. But this price undercutting could not be sustained in the long run. So the firms started taking up non-price strategies such as advertisement campaigns, sponsoring sports events, gong into agreements with restaurants where their products were offered as parts of meals and such other sales promotion strategies. There is significant amount of rivalry among the two giants which leads to significant amount of strategic interdependence.
An entry into this segment calls for some interesting modification in the product to be offered, in the first place. It is important to note that aerated drinks market is facing a fall in demand, to some extent, due to health consciousness among a section of the people. These drinks are high in their sugar content. Apart from that carbonated drinks have other health issues attached to it. To enter this market the way should be to offer product that suits the taste of the consumers but is devoid of the health problems associated with aerated beverages. This requires some research on product quality. So the initial cost of establishment will be high.
Once the product is established as a differentiated product, the next step would be to follow some sales promotion strategy to expand the market. Price competition will not be a viable strategy in this case as the initial costs will be high and the competitors have already a good foot hold in the company and can enter into predatory pricing strategy. The best way would be to charge a price that reflects the difference in quality of the product compared to the products of the existing firms.
The advertisement campaigns and other sales promotion strategies should highlight the health benefit of the new product vis-a-vis the products of the existing companies. This will lead to a shift in the demand curve. We should note that the elasticity of cold beverages is moderately elastic. With proper sales promotion strategies and product modifications this elasticity can be reduced for this product compared to the product of the existing giants in the market.
Though the initial cost will be high due to product modification and sales promotion campaigns, the profit will be higher in the long run as the elasticity will be reduced (Pindyck & Rubinfield, 2009). Charging a higher price compared to the competitors will lead to a higher profit as the market size will be high given the nature of the product. The new product can eat upon some part of the market of the existing companies. In addition to that, taking a patent for the new product that has added health benefits will keep further entry into this differentiated category at bay.
Though the firm will have to make an extra effort at product modification and market penetration at the initial stage, once it has established itself it can enjoy significant market power and higher profits.

Works Cited
Bailey, S. (2014, November 20). A guide to the non-alcoholic beverage industry. Retrieved from Market Realist: http://marketrealist.com/2014/11/guide-non-alcoholic-beverage-industry/
Pindyck, R., & Rubinfield, D. (2009). Microeconomics (7th ed.). Prentice Hall.