Market Power

Question 1. First of all, it should be noted that there are a lot of methods used by economists in order to determine the connections between different economic variables. These methods include: scientific abstraction, observation, induction, deduction, controlled experiment, modeling, etc. One of the main methods in the process of economic researches is scientific abstraction. However, before the direct analysis of this method, the definition of scientific method should be provided. Scientific method is a method of research in which a problem is identified, relevant data are gathered, a hypothesis is formulated from these data, and the hypothesis is empirically tested (Scientific method). Additionally, the essence of such method as scientific abstraction should be considered. The method means that in the process of economic researches, fugitive, random, and secondary signs of some economic phenomenon are separated from the established, and typical. That is why abstraction means simplification. Therefore, economic models are some simplified picture of economy.

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All economic theories based on these economic philosophies can be considered as results of economic abstractions, since all of them are developed with certain assumptions, which simplify the economic reality. Therefore, scientific abstraction helps us to understand the connection between certain economic variables. That is why there should not be any moral or ethical discussion about the economic theories, since they can be considered as simplified picture of reality.

Question 2. As it is known, there are three main philosophies of economics: classical approach, Keynesianism, and Marxism. Classical approach appeared in the works of such famous economists as A. Smith, W. Petit, D. Ricardo, J.-B. Sei, and J. S. Mill. Supporters of this approach have accentuated on the existence of autonomous forces of regulation in a national economy. They also supported the idea that market organizes the national economy in the best possible way, thus a governments interference is unnecessary. That is why the market economy should be organized based on private ownership, while other form of ownership were considered as inefficient by the supporters of Classical approach.

According to Keynes, the market system has no automatic mechanism that would ensure full employment of resources. Recession may move in a prolonged depression that can continue for many years. A balance of total expenditure and GDP can be achieved far from its full employment level. In contrast to the classical tradition, Keynes believed that various forms of ownership can be effective, including state ownership. That is why the supporters of Classical approach believed that only private ownership is effective, while other forms of ownership are inefficient.

On the other hand, the Bible does not gainsay the private ownership, but the people should not be focused only on private property, since you cannot serve both God and money (Matthew 6:24). Jesus answered, If you want to be perfect, go, sell your possessions and give to the poor, and you will have treasure in heaven. Then come, follow me (Matthew 19:21). That is why in accordance with the Bible, people should be focused on their relations with God, not on ownership.

Additionally, it should be noted that private ownership is the most effective kind of ownership, since an owner has a lot of stimulus to make its business as profitable as possible. However, state ownership should also exist, since in the process of economic recession, the government is able to take steps to improve the current situation based on its ownership.

Question 3.

First, the industry of producing beverages should be considered. The Coca-Cola Company and the PepsiCo are the biggest producers of beverages in the world. The stock price of each company should be considered. According to the data provided in table 1, the high stock price of the Coca-Cola Company at the day of its initial public offering (Jan 2, 1962) was $103.75 while the high stock price of the PepsiCo, Inc. was $80.25. For this reason, the Coca-Coca Company was more popular than its main competitor the PepsiCo. It means that the Coca-Cola Company has become more attractive for potential investors because its general financial state and profitability ratios were increasing.

Table 1

The Companies Stock Price

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Company's name

Stock Price

The day of its initial public offering

January 4, 2010

January 3, 2011

January 3, 2012

Coca-Cola Company (Jan 2, 1962)

103,75

57,43

65,88

70,71

Pepsi Co, Inc. (Jan 3, 1977)

80,25

62,92

67,46

67,19

On the other hand, the high stock price of the PepsiCo was $62.92 on January 4, 2010, $67.46 on January 3, 2011, and $67.19 on January 3, 2012. For this reason, the companys stock price increased during the last three years. It means that the companys financial state, its productivity, sales, and general effectiveness increased and, as a result, the company has become more attractive in terms of potential investors.

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In addition, it should be noted that the Coca-Colas stock price was increasing faster than the PepsiCos stock price. Moreover, the stock price of the PepsiCo decreased in 2012 in comparison with 2011, while the Coca-Colas stock price increased by 7.33%. Also, according to the data provided in table 1, the Coca-Colas stock price was higher on January 3, 2012, and thus this company is more attractive for investments.

Table 2

The Companies Financial Indicators

GROWTH RATES %

Coca-Cola Company

PepsiCo inc

Dr Pepper Snapple Group, Inc.

INDUSTRY

Sales (Qtr vs year ago qtr)

-3,60

0,80

-1,40

-2,75

Net Income (YTD vs YTD)

NA

NA

NA

NA

Net Income (Qtr vs year ago qtr)

-8,40

4,90

-8,20

-5,24

Sales (5-Year Annual Avg.)

7,96

8,96

0,99

9,28

Net Income (5-Year Annual Avg.)

8,10

5,60

NA

8,23

Dividends (5-Year Annual Avg.)

8,06

6,30

NA

8,20

Gross Margin

60,68

52,96

58,33

56,47

Pre-Tax Margin

24,50

13,39

9,04

18,63

Net Profit Margin

18,32

10,15

10,41

14,01

5Yr Gross Margin (5-Year Avg.)

62,00

53,00

58,90

60,99

5Yr Pre Tax Margin (5-Year Avg.)

28,60

14,50

14,30

27,62

5Yr Net Profit Margin (5-Year Avg.)

22,20

10,80

10,10

701.81 Bi

Return On Equity

26,03

28,79

27,39

26,99

Return On Assets

9,74

8,86

7,29

9,28

Return On Capital

12,14

11,53

10,46

12,54

Return On Equity (5-Year Avg.)

30,80

32,50

23,70

30,34

Return On Assets (5-Year Avg.)

13,30

10,80

6,60

13,08

Return On Capital (5-Year Avg.)

16,90

15,20

9,40

17,45

According to the data provided in Table 2, PepsiCo was the most effective company during the last year, since its sales and net income was increased, while its competitors sales and net income were reduced. However, during the last five years, the most profitable company was the Coca-Cola.

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According to the following figure, the Coca-Colas market share was reduced from 38.2% in 2009 to 37.1% in 2012. Moreover, the PepsiCos and market share was also decreased from 32% in 2009 to 30.2% in 2012. On the other hand, the market shares of the Dr Pepper Snapple Group and other companies were increased. It means that the Coca-Colas market power is bigger than the PepsiCos. However, the market power of both companies was reduced during the last years.

It should be also noted that the Coca-Cola Company only once conceded the title to Pepsi - in the 70s all over America so-called blind tests on the taste have been carried out and the most people preferred Pepsi. Therefore, president of Coca-Cola Company immediately decided to change the recipe and, as a result, it returned its leading position less than a year later.

To conclude, it should be stated that both companies use the marketing strategies related with sponsorship, and expanding the assortment of products. These strategies were not very successful, since the market shares of both companies were reduced during the last years. Also, there are some negative images of both companies soft drinks.

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