Friday, June 3, 2011

Coca-Cola Pricing

The Financial Times published an article on Coca-Cola's defense of it's domestic pricing at an investment conference. Specifically, Coke managers were questioned about relatively low prices in the US given the increases in input prices and the expectation by some on Wall Street that Coke could pass on more of the input price increases for these products.

From an economic point of view (and really that is the point of view of this blog), the pricing issue boils down to a concept called elasticity. Economic theory shows us that as goods become more inelastic (consumers are less sensitive to changes in prices) then firms have a greater ability to increase output prices (i.e. the price of Coke) given an increase in input prices (i.e. the prices of goods used to make Coke). Thus a good understanding of how elastic Coke's customers are in terms of price will help the firm to determine the amount (if any) that Coke can raise their price.

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