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How Coke and Pepsi Have Evolved – By Samuel Phineas Upham

By Samuel Phineas Upham

In the paper “The Organization of Distribution in the Carbonated Soft Drink Industry,” authors Timothy J. Muris, David T. Scheffman, and Pablo T. Spiller provide a fascinating and controversial theory that attempts to answer why Coke and Pepsi changed their relationships with their bottlers.

In the early days of Coke and Pepsi, the companies had contracts with only bottling distributors to whom they gave exclusive rights over territory. However, things have changed over the past twenty years. Both companies have been taking stakes in their bottling distributers at a fast rate. Indeed both firms now own nearly half of their bottlers and hold stakes in nearly twenty percent of the outstanding companies. The main questions the authors attempt to answer in the paper are: what made both soft drink companies internalize bottling and distributing and whether this change has had an effect on the market. To get to the bottom of these questions, the authors start with a historical structural analysis and explain the findings through a transaction-cost model. It made sense for Coke and Pepsi to internalize a once externalized business because of changing technology, marketing, and marketplace have all contributed to a rise in the costs of independent bottlers.

There are two theoretical concepts discussed in this essay: 1) those of blending various approaches into one story 2) and learning how transaction cost analysis intermingles with various elements of the market such as market concentration and competitive moves, to name a few. The authors develop and contrast two historical cost frameworks. They suggest that real world transacting is so complex and transcends the classic approach of the dynamics between “asset specificity and vertical integration” and therefore requires comprehensive transaction cost analysis. The first framework was set into place when the companies first started their bottling operations, when the bottlers had the right to distribute drinks in a certain territory and in return the bottlers would gain the opportunity to create networks, take part in marketing and advertising, and invest in company assets. The authors state that this type of contract was vital due to the bottler’s investment as opposed to the freedom of the drink company. As a bottler invested into Coke, the drink company could drop a bottler without any consequences or ask a different bottler to distribute products in any given territory.

You can also read this related presentation.

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