Oligopoly, Nash Equilibrium and Disruptive Innovation

Sunita Narain, director of CSE, found that Coke and Pepsi contained high concentration of pesticide. Level that was unacceptable in western world, but acceptable in India.

As expected both Coke and Pepsi rejected the charges. They blamed underground water for high concentration of pesticides, besides it was within limits allowed by Indian laws. If Indian standards were low, they cannot help it.

pesticide

They also roped in PR consultants like Suhel Seth (by paying hefty fee) to promote their cause. Public memory is short, soon controversy died and people again started drinking Coke and Pepsi.

coke bottle

Coke and Pepsi dominate cola market not just in India, but in most parts of world. It is oligopoly, where just two players dominate the market. As in oligopoly, each is aware of the actions of the other. The decisions of one therefore influence and are influenced by the decisions of other. Their strategies are predictable and not very different from other. Situation is similar to Nash equilibrium of game theory.

coke and pepsi

Nash equilibrium is concept in game theory where the optimal outcome of a game is one where no player has an incentive to deviate from his or her chosen strategy after considering an opponent’s choice i.e. an individual can receive no incremental benefit from changing actions, assuming other player’s strategy remains constant.

Such situation is ripe for disruptive innovation

Professor Clayton Christensen of HBS, who coined the term disruptive innovation, describes it as…

“A process by which a product takes root initially at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors. It allows a whole new population of consumers at the bottom of a market access to a product that was historically only accessible to consumers with a lot of money or a lot of skill.”

Characteristics of disruptive businesses can be lower gross margins, smaller target markets, and simpler products that may not appear as attractive as existing ones.

Someone has to come up with carbonated drink that will cater people who cannot afford to buy Coke and Pepsi- product that is cheaper, accessible and perhaps healthier. This product can then over a period of time displace established players like Coke and Pepsi.

Will local brand like Sosyo, which currently dominates Gujarat market, be the disruptive innovator?

sosyo

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