Thursday, November 5, 2009

Vertical Integration in Soft Drinks

Earlier this summer, Pepsi announced that they will be buying their two largest bottlers for around $7.8 billion. This is an example of the oligopolistic vertically integrated model that I talk about in Industrial Organization and the MBA Managerial Economics courses.

Here we have primarily two upstream firms (Coke and Pepsi) and two or more downsteam firms, Coke's bottlers and Pepsi's bottlers. Now the upstream firms have (simply) two options, to vertically integrate (buy their bottlers) or to not vertically integrate. Each has an incentive to vertically integrate and by doing so, will make lower profits than by not vertically integrating. It is a great example of the Prisoner's Dilemma.

See my brief discussion on the attempt to vertically integrate live concert events, which fits closer to the monopoly vertically integration model.

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