To you, the difference in utility is large, hence to you they are not substitutes.

They are to some people because if one is not available they will take the other without much decrease in satisfaction. Substitutes are two goods that consumers (you and me) can purchase, and substitute with one another should something happen to one. Coke and Pepsi are substitutes because they basically are the same product (not including someone's preference) if you go somewhere and they don't have Coke you usually will just take Pepsi. 7-Up and Sprite are also substitutes because if one place doesn't carry one you will just have the other. Also, if the price of Coke goes up by $5, most likely people will stop purchasing Coke and buy Pepsi instead, which is at a much lower price They are very similar products that most people will take either if only one is available. Availability and price is the main decision factor in selecting substitute products.

The two main competitors for our introduction of Fei Fei Cola in the cola market are Coca-Cola Company and PepsiCo Inc. Both are very successful and dominate the cola as well as other soft drink markets. For the product category cola, Coca-Cola and Pepsi are perfect substitutes without noticeable taste difference;however, the two products are not substitutes for most of the people. Cola as a drink is a low involvement product, but marketers for both Coca-Cola and Pepsi have tried to increase consumers' involvements throughout various advertisement campaigns and sponsoring various events. Taking a good look at their marketing actions and the consumer reactions to it will provide important information regarding our new product.

http://html.rincondelvago.com/consumer-behaviour_1.html http://en.wikipedia.org/wiki/Substitute_good

ARTICLE : - Pepsi cuts price, Coke yet to follow suit April 15, 2003 15:03 IST Heralding the cut-throat summer competition in soft drinks, Pepsi said on Tuesday that it has slashed prices of its 300 ml returnable glass bottles to Rs 6 in the capital and this price cut may be extended to other markets to make its brands more affordable. However, Coca-Cola appears to have been caught on the wrong foot, with its 300 ml pack still priced at Rs 8. When contacted, Sunil Gupta vice-president (external), of Coca-Cola India, told PTI, "We're making no fresh comments on our pricing strategy. Right now, our 300 ml pack continues to be priced at Rs 8." The fresh price war, triggered by Pepsi, follows an earlier onslaught when both the companies reduced prices by about 20 per cent across the board just before the Union Budget for 2003-04, which provided them excise duty relief. A Pepsi spokesperson said, "In a high-consumption market like Delhi, aggressive price points devolving from the 300-ml segment will work much better. Our price strategy for this market, therefore, works off this thinking. As a consequence, 200-ml bottles are priced at Rs 5. The new price points are 300 ml at Rs 6, and 200 ml at Rs 5." According to industry sources, this sector is heavily dependent on returnable glass bottles and Pepsi's latest price reduction strategy is critical to drive volumes. Sources said earlier this year, Coca-Cola had taken the price war head on by introducing 600-ml PET bottles priced at Rs 12 each, beginning with Maharashtra, one of Pepsi's key markets. Pepsi, which was selling 500-ml PET bottles priced at Rs 15 each, was caught on the backfoot and was forced to react, beginning with

reduction in prices of its 500 ml bottles to match that of Coke, the sources said. Meanwhile, action may now shift to the 200-ml segment. According to industry sources, Coke is offering Sunfill sachets priced at Rs 2 each, free with 200-ml and 300-ml bottles, in some regional markets. In effect, therefore, while Coke's price points for 200-ml and 300-ml bottles remain at Rs 5 and Rs 8 respectively, the consumer is being offered more for less. In the home-consumption segment too, Coca-Cola took the lead earlier this year by slashing prices of its 1.5-litre and 2-litre PET bottles. Pepsi too reduced prices of its 1.5-litre and 2-litre PET bottles, to Rs 35 and Rs 40 respectively, against the earlier price of Rs 43 and Rs 50. Copyright 2003 PTI. All rights reserved. Republication or redistribution of PTI content, including by framing or similar means, is expressly prohibited without the prior written consent. Source : - http://www.rediff.com/money/2003/apr/15pepsi.htm

2. ANALYSIS : - It can be inferred from the above article that Coca-Cola and Pepsi are perfect substitutes and hence the pricing strategy of one directly impacts the demand for the other product. Hence, the indifference curve of Coca-Cola and Pepsi would be a straight line with equal slopes across all points on the line. Pepsi slashed the price of its 300ml bottles from Rs.8 to Rs.6, thus anticipating an increase in the demand and consumption of its product. The same can be depicted by plotting the price elasticity of demand for Pepsi. Pepsi reduced its price from P1(Rs.8) to P2(Rs.6), which would result in an increase in consumption from Q1 to Q2. Since, Coca-Cola and Pepsi are perfect substitutes; an increase in consumption on Pepsi would result in a proportionate decrease in the consumption of Coca-Cola. In order to maintain the balance and not loose out on the market share, Coca-Cola decided to offer Sunfill sachets priced at Rs2. for free along with the 300ml bottle, thereby increasing the Marginal Utility of its product. This would also result in an increase in the consumption of Coca-Cola. Thus, as Coca-Colas Marginal Utility moved from MU1 to MU2, due to the value addition, so would the Quantity move from Q1 to Q2. However, since Pepsi reduced the price of its 300ml bottle, it resulted in the movement of the budget line, due to which more customers will be prompted to consume Pepsi instead of Coca-Cola. As depicted in the adjoining figure, since the price of Pepsi reduced, the Budget Line of Pepsi and Coca-Cola, moved from B1 to B2. This resulted in a further increase in the consumption of Pepsi from P1 to P2. Hence, it can be concluded that the best way for Coca- Cola to counter this would be by reducing the price of its 300ml bottle to match it to that of Pepsis. This would be needed since Pepsi and Coca-Cola are perfect substitutes.

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