Page 555 - Microeconomics, Fourth Edition

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Pepsi have been competing to sign exclusive distribution deals with colleges throughout the United States.
In 1992, for example, Pepsi paid Penn State $14 million to be the school’s official drink. Under this deal, no
other brand of soda could be sold anywhere on Penn State’s 21 campuses. Not to be outdone, in 1994
Coke paid $28 million to the University of Minnesota to be that university’s sole supplier of soft drinks and
to place signs at sports venues and in campus food service areas. The $28 million was used for scholarships,
student activities, and a women’s hockey team.
The “cola war” between Coke and Pepsi is an example of competition between a few firms whose
fortunes are closely intertwined. Moreover, Coca-Cola and Pepsi sell differentiated products. Although
most people view Coca-Cola and Pepsi Cola as similar products, few consider them identical products.
Indeed, many consumers have long-standing loyalties to either Coke or Pepsi. The desire to develop these
brand loyalties at an early age has led Coke and Pepsi to place such strategic importance on gaining exclusive
access to college campuses.
What forces drive the outcome of competitive battles in markets that have only a few sellers or in
which consumers see products as imperfect substitutes? Neither the theory of perfect competition that we
studied in Chapter 9 nor the theory of monopoly in Chapter 11 applies to the competitive battle between
the two soft drink giants.

CHAPTER PREVIEW After reading and studying this chapter, you will be able to:
• Describe the conditions that characterize different types of market structures, including oligopoly
markets, dominant firm markets, and monopolistically competitive markets.

• Find the reaction function that shows how one firm sets its profit-maximizing quantity or price given
the quantity or price of the other firm.

• Sketch the reaction function for a
quantity-setting or price-setting
oligopoly firm.
• Compute the equilibrium in the Cournot
model of oligopoly and illustrate it
graphically.
• Explain how and why the Cournot
equilibrium differs from a Bertrand
equilibrium in a homogeneous products
oligopoly.
• Find the Stackelberg equilibrium and
explain how and why it differs from
the Cournot equilibrium.
• Compute the equilibrium in the
dominant firm model and illustrate it
graphically.

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