Research on the Collusion and Competition in Oligopolies Through

Game Theory Perspective: A Study on Coca-Cola vs. PepsiCo

Zhiyu Li

The Affiliated International School of Shenzhen University, Shenzhen, Guangdong, 518060, China

Keywords: Coca-Cola, PepsiCo, Oligopoly, Game Theory, Oligopolies.

Abstract: Employing game theory frameworks, this study systematically examines the mechanics of competition and

collusion within the Oligopoly market, particularly referring to Coca-Cola and PepsiCo as a case study. Using

2015-2023 pricing data. Specifically addressing: (1) tacit collusion mechanisms (2) strategic differentiation

(3) innovation incentives. The analysis will be conducted through the lens of game theory to monitor and

understand how two prestigious players operate and respond to achieve market efficiency. In addition, the

paper showcased the differences and similarities between the two players, further providing insight into what

had shaped their current situation. Building on these insights, strategic recommendations have been provided

to depict how collaborations can foster more sustainable development and growth for this duopoly. It

highlights how tacit collusion and strategic interdependence shape market outcomes, providing a framework

for analyzing similar industries (e.g., technology, aviation). The study also underscores the fragility of

collusion under external pressures, offering insights for policymakers regarding antitrust regulation and

market efficiency. This has practical implications for corporate strategy, suggesting that duopolistic firms can

benefit from differentiated positioning to mitigate direct competition.

1 INTRODUCTION

Oligopolies are referred to as a market dominated by

a few producers, each of which has significant control

over the market and fits conceptually between the

extremes of perfect competition and monopoly (Lee,

Jae-Woo, 1990). Such markets can be exemplified by

Coca-Cola and PepsiCo, brands that possess the

characteristics of oligopolistic: high barriers to entry,

price-setting power, and a balance between

cooperation and competition. In such oligopolistic

markets, the strategies employed are heavily

dependent on what the rival does, in this case, Coca-

Cola and PepsiCo. Thus, this paper aims to provide a

comprehensive framework for analyzing the dynamic

interactions spanned over a century between these

two titans through the lens of game theory. This

theoretical framework is particularly relevant to the

Coca-Cola-PepsiCo duopoly, whose strategic

interdependence aligns with game-theoretic

predictions.” This analysis will dissect their rival side

of aggressive competition and an uncommon face of

implicit coordination. The paper will also address

https://orcid.org/ 0009-0003-3830-3074

how antitrust regulation and market efficiency can

offer insights and reveal the mechanism behind the

choices of these giants.

The Coca-Cola-PepsiCo rivalry, spanning over a

century and is often known as the term “Cola Wars”,

depicting the perfect model of oligopolistic

interdependence. The total market share of

carbonated soft drinks of these two brands is just

under 70%, further indicating oligopolistic qualities

(Abi Rafeh et al., 2025). For over a century, despite

the two brands having intervened in a war of

advertisements, products, and pricing strategies.

“Despite opportunities for collusion (e.g., joint price

hikes), both firms consistently choose competitive

strategies like price cuts. This paradox can be

explained by the Prisoner’s Dilemma model, where

short-term defection and incentives outweigh long-

term cooperative gains.” It could be believed that the

answer to why collusion is rare in this duopoly can be

revealed through the Prisoner’s Dilemma model. The

Dilemma model exhibits that while cooperation

enables long-term winnings for both firms, the

Li, Z.

Research on the Collusion and Competition in Oligopolies Through Game Theory Perspective: A Study on Coca-Cola vs. PepsiCo.

DOI: 10.5220/0013822400004708

Paper published under CC license (CC BY-NC-ND 4.0)

In Proceedings of the 2nd International Conference on Innovations in Applied Mathematics, Physics, and Astronomy (IAMPA 2025), pages 213-218

ISBN: 978-989-758-774-0

213

incentive to deviate for short-term gains is of greater

attraction.

However, such titans do act in quiet cooperation

despite their actions do not require a formal contract.

Such tacit informal collusion or cooperation can be

monitored via repeated game models due to fear of

retaliation arising from defection. This can be

exhibited through the “tic-for-tat” model and is

observed in their synchronized responses to market

shifts, such as matching regional price adjustments

within 48 hours. Yet other factors can easily disrupt

this balance, and the paper will analyze what enabled

such balance (Escrihuela-Villar & Guillén, 2025).

Such avoids direct price wars and reduces the

temptation to cheat on this rule.

The aim of this paper is to evaluate and analyze

the model and answer the question of how such a

perfect example of an oligopoly can function with

unspoken rules to come to an equilibrium through

cooperation or competition. “Given the firm’s long-

term strategy, Nash equilibrium is yet believed to be

the answer to such questions; thus, game theory will

be elaborated on.

2 DESCRIPTION OF

COCA-COLA AND PEPSICO

2.1 Description of Coca-Cola

Coca-Cola is one of the most pervasive and iconic

drinks globally. Invented in 1886 by pharmacist John

S. Pemberton in Atlanta, Georgia, Coca-Cola was

initially marketed as a medicinal tonic to relieve

headaches and fatigue. However, its unique taste

quickly transitioned it into a popular carbonated soft

drink. The name “Coca-Cola” is derived from its two

main ingredients: coca leaves and kola nuts. By the

mid-20th century, Coca-Cola had become

synonymous with American culture (Ama, 2025).

What initially contributed to Cola’s success was

its iconic logo, which was designed and tailored by

Frank M. Robinson, as the logo was extremely eye-

catching. The brand has adopted a diversification

strategy with a portfolio composed of a wide variety

of products, including its flagship, Cola. Its portfolio

spans 500+ brands across 200 countries, including

Minute Maid (juices), Powerade (sports drinks), and

Smartwater (premium hydration) (Vergeer et al.,

2025. Since its inception, Coca-Cola has employed

extensive advertising to increase its beverage market

share, enabling it to become one of the most

recognized drinks globally. This allowed Coca-Cola

to gain a total market share of 42.2% in 2013

(Dimetrakos et al., 2025). For example, engaging in a

wide variety of collaborations with packaging

consisting of the World Cup elements enabled it to

gain a feeling of exclusivity and vitality. Coca-Cola

targeted its audience to be the younger demographic

because middle-aged and above individuals are more

conscious of health. As the volume of sugar and other

ingredients cooperated into Coke, it has been

classified as a sugary and unhealthy beverage.

Cola was extremely successful in creating a

presence in the market by global expansion. This was

depicted in a study by SP et al. (2025) on Coca-Cola’s

marketing strategy in India, which enlightened how

the brand was able to adapt to resonate with the local

consumer. Cola’s method of adaptation included

increasing cultural relevance to engage with the

younger demographic. This method had been utilized

by the brand consistently in a range of other similar

economies to gain market dominance (Mufti, 2025).

Coca-Cola’s success can be attributed to its ability

to consistently innovate by jumping out of the

conventional beverage market and preserving its core

brand identity. For example, its 2018 launch of Coca-

Cola Energy directly challenged Red Bull in the

functional beverage sector. It could be argued that its

commitment to maintaining a positive public image

has earned a wider consumer base, and through

strategic co-brandings and marketing campaigns, the

brand can continue to win the race in such a

competitive global market (Mufti, 2025).

2.2 Description of PepsiCo

Unlike Coca-Cola’s beverage-centric approach,

PepsiCo leveraged snack-food synergies to capture

58% of the global savory snack market. Its aggressive

method of product diversification allowed it to

differentiate itself away from Coca-Cola by

preventing direct competition; this method, in parallel,

allowed PepsiCo to derive 75% of its revenue from

snacks (e.g., Frito-Lay, Doritos, etc.) and beverages.

(Omoruyi & Durojaye, 2025) Similar to Coca-Cola,

the brand’s main targeted demographic is the younger

generation, those who are believed to be more into

pop culture. PepsiCo achieved this through

collaborations with NBA and TikTok influencers.

The PepsiChallenge TikTok campaign generated 2.1

billion views, increasing youth market penetration by

11% (Donga, Chimucheka & Shambare, 2025).

Market data indicates PepsiCo’s diversification

strategy generated over $70 billion in revenue from

its snack division. Such success is closely related to

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the brand’s ability to adapt to the dynamic market by

tailoring its marketing strategies to resonate with

local consumers, enabling it to gain market

dominance globally. With products sold in over 200

countries and territories (Donga, Chimucheka &

Shambare, 2025). One of the brand’s marketing

strategies is to emphasize health and sustainability

due to the growing concern of consumers regarding

these aspects. The brand emphasized this by

expanding its menu to introduce healthier snacks and

beverages like Bubly sparkling water. In addition, it

is attempting to switch all its packaging to recyclable

and biodegradable packaging by 2025 to align with

the norms of current society and to respond to the

criticism about the plastic waste that has been

generated. This strategy deeply enhanced the brand

image (Donga, Chimucheka & Shambare, 2025).

3 COMPARATIVE ANALYSIS OF

COCA-COLA AND PEPSICO

3.1 Similarity of Coca-Cola and

PepsiCo

3.1.1 Repeated Games and Tacit Collusion

From a game theoretical standpoint, the duopoly

operates as a repeated game, with firms strategically

interacting through pricing, advertising, and product

differentiation to maximize payoffs. In a repeated

game, the firms need to take into consideration both

short-term gains and long-term gains, thus forcing the

two firms to contribute to tacit collusion. For instance,

both PepsiCo and Coca-Cola purposefully avoided

price wars that depicted the “grim trigger” strategy.

The grim trigger strategy is when defection can

trigger retaliation in the new round of the game,

which could potentially cause both firms to worsen.

For example, when PepsiCo tested a 10% price cut in

2018, Coca-Cola matched within 72 hours,

demonstrating retaliatory capacity. However, this

collusion remains fragile due to external factors.

Rising health concerns for carbonated soft drinks

cause the equilibrium between the collusion to be

disrupted as it can easily alter the payoff the brands

can gain within. Health trends reduce CSD demand

elasticity, lowering collusion stability from 0.7 to 0.3,

measured by the HHI index.

3.1.2 Prisoner’s Dilemma in Advertising and

Innovation

Another game theory model, the Prisoner’s Dilemma,

explains the reason why collusion is extremely

difficult behind the duopoly. The Prisoner’s Dilemma

can be seen as the mechanism behind their advertising

competition, where both Coca-Cola and PepsiCo

decide whether or not to invest heavily in advertising.

If both firms reduce spending, the Nash equilibrium

collapses as either can unilaterally increase

advertising to capture market share.

This logic extends to R&D decisions: Such a

model could also be applied to its innovative

strategies as the dilemma arises when both companies

can decide whether or not to invest in a new product

or rely heavily on their core-centric product. If one

company decides to invest more in innovation over

the other, it can gain a higher market share and profits

due to being a more competitive edge. This explains

why both firms maintain R&D spending at 4-5% of

revenue despite profitability risks.

3.1.3 Adaptation to Social Norms

Coca-Cola and PepsiCo’s synchronized response

towards adapting to the dynamic market of consumer

preferences shifts towards more health-conscious

social norms--Coca-Cola’s launch of zero sugar and

PepsiCo’s Bubly. The Prisoner’s Dilemma

framework demonstrates how Nash equilibria are

reached in this situation. Considering that if one firm

abandons investments in healthier alternatives, the

other can gain a competitive edge. Such damages the

interest of the other firm and thus forces both Coca-

Cola and PepsiCo to maintain a 4-5% investment in

research and development on such aspects.

3.2 Differences Identified Between

Coca-Cola and PepsiCo

3.2.1 Portfolio Diversification

Coca-Cola’s strategy remains beverage-centric, with

approximately 70% of its revenue generated from soft

drinks and the remaining from water and orange juice.

Enabling presence and dominance to be fostered in

the current beverage market. In contrast, PepsiCo has

adopted a more diversified strategy, where it

promotes both snacks and beverages. Statistics

display that 25% of profits are from snacks. This

approach enables PepsiCo to gain a wider customer

base and reduces the risk of reliance on a single

product.

Research on the Collusion and Competition in Oligopolies Through Game Theory Perspective: A Study on Coca-Cola vs. PepsiCo

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In terms of through the lens of game theory, this

approach demonstrated Nash equilibria, and both

firms will not deviate from their current state in

assuming that one’s reluctance to leave the beverage

market and the other to prioritize snacks. It could also

be understood that both brands do not dare to deviate

in fear of retaliation and so had prevented the two

firms from triggering a race where they “race to the

bottom”. At present, it can stabilize its market

position without harming profitability.

3.2.2 Brand Identity

It could be seen that Coca-Cola hinges upon universal

nostalgia as a brand, targeting a wider demographic,

whereas PepsiCo adopts a youth-centric disruptor.

PepsiCo can be seen to be more trend-driven through

its social justice campaign “Black Lives Matter ”

support.

Coca-Cola’s brand identity is deeply rooted in

nostalgia and universal values, appealing to a broad

demographic that spans various age groups and

cultures. This strategy cultivates emotional

connections, fostering brand loyalty that transcends

mere product consumption.

Despite this strategic differentiation fostering

competitive tension, the distinctiveness enables brand

loyalty to be maintained within a specific targetted

demographic.

3.2.3 Geographic Strategy

Coca-Cola has focused on expanding its global

presence by tailoring its products to fit the taste of its

local tastes. Such action enables the product to

become widely known across a wide variety of

regions. On the other hand, PepsiCo uses regional

insights to design specific products, and its various

combinations of products enable it to gain dominance

in various markets. Both firms engage in a strategy

where they try to reduce their risks to a minimum by

considering the local factor.

3.3 Vulnerabilities in the Duopoly

3.3.1 External Shocks

Both companies share a common problem: They are

susceptible to external shocks such as economic

crises like pandemics or dynamic market changes.

These phenomena can significantly influence

consumer behaviors, which forces both firms to take

action in response. Such actions and strategic

responses might include price reductions.

3.3.2 Regulatory Risks

Consistent changes in regulations are a major obstacle

for both Coca-Cola and PepsiCo as they can directly

affect their operational mode. For example, sudden

exposure to sugar taxation and environmental

legislation has forced firms to re-create their products

or change their strategies for more sustainable

practices. Such involves an opportunity cost and

disrupts the current equilibrium in the two firms’

game.

3.3.3 Innovation Races

Coca-Cola and PepsiCo compete in an innovation

race where there is a necessity for investment in

research and development to become more attractive

to the market consistently. This is to prevent fatigue

in the dynamic market. Such an innovation race will

evoke competition between the duopoly, and

collaborations will need to be made between the

duopoly to achieve sustainable growth.

4 SUGGESTIONS

4.1 Tackling the Vulnerability of

Collusion Under External Shocks

It could be suggested that both firms utilize a game

theory model that integrates the real-time market

rather than a current game model that is stabilized. In

other words, the Nash equilibrium should be

employed as a period for transition and adaptation

rather than as a long-term solution. Such enables risk

to be anticipated and prevents the vulnerability of a

firm under the pressure of external shocks. Such a

method could include reducing the competition

between companies through innovating products that

complement each other instead of acting as a

substitute and, in other words, reducing the duopoly

characteristics between the two firms. The reduction

of the duopoly effect could also be achieved via the

investment in consumer behavior to understand the

needs of consumers better and to be able to reposition

its current product with more tailored offerings that

can avoid direct competition in products.

4.2 Escape from the Trap of Prisoner’s

Dilemma

It could be understood that both Coca-Cola and

PepsiCo operated in a game called Prisoner’s

Dilemma. For more sustainable and long-term

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development, it could be suggested that both

companies escape from such a trap. Both companies

could compromise and engage in cooperative

agreements that can benefit the industry and the two

individual firms as a whole rather than concentrating

on the suboptimal payoff at current. In addition, the

duopoly could cooperate to address problems faced in

the industry as a whole in order to lessen the pressure

that arises from the need to respond to the ever-

changing market as well as the fear of actions taken

by the rival. To escape from the trap of the Prisoner’s

Dilemma, it is vital for both firms to be able to address

and optimize their joint payoffs. The reason for such

change is because, currently, where Coca-Cola and

PepsiCo operate in an innovation race, their marginal

payoff is diminishing due to rises in the cost of

development and research of more innovative

offerings.

4.3 Addressing the Differences in Coca-

Cola and PepsiCo

By addressing the differences between Coca-Cola

and PepsiCo, the companies are able to avoid direct

competition between each other and thus can reduce

the harm within. While Coca-Cola’s brand identity

focuses on emotional engagement and PepsiCo upon

trendiness, the two firms could further emphasize

these differences. In addition, Coca-Cola can

continue to provide low-sugar alternatives as PepsiCo

continues to concentrate on its snack varieties.

5 CONCLUSION

This study used game theory to look at the

competition and cooperation between Coca-Cola and

Pepsi. It found several important points. First, the two

companies work in a duopoly and play a repeated

game. In this kind of game, they often avoid price

wars by making similar pricing decisions. This shows

a form of silent cooperation. However, the prisoner's

dilemma explains why open collusion is rare—both

companies focus on short-term gains instead of long-

term cooperation, especially in areas like advertising

and R&D.

Second, even though the competition is strong, the

two companies use different strategies. Coca-Cola

focuses on drinks and a nostalgic brand image, while

Pepsi uses snack products and targets young people

in its marketing. This difference helps them keep a

stable Nash equilibrium and avoid direct conflicts.

Third, outside changes, such as health trends and new

rules, can break the balance. This pushes both

companies to innovate and change their strategies,

like offering healthier products.

This study applies game theory to a real-world

duopoly and helps people understand how oligopolies

behave. It shows how silent collusion and strategic

decisions affect the market. The findings also offer a

way to analyze other industries, such as tech or

airlines. The study highlights how outside pressure

can make cooperation between companies unstable,

which gives useful ideas for policymakers in antitrust

and market regulation.

Also, the results challenge the usual view that

oligopolies are either competitive or cooperative.

Instead, the study shows a balance between the two.

This is useful for business strategy because it suggests

that companies in a duopoly can benefit from being

different from each other, which helps reduce direct

competition.

There are some limits to this study. It uses secondary

data, which might not show real-time decisions.

Future research could include interviews with people

in the industry or game theory experiments. Also, the

study mostly looks at pricing and advertising, but

other factors like supply chain or politics need more

attention.

The study also does not fully explain how new

competitors (like health-focused brands) could

change the market. Future work could look at how

Coca-Cola and Pepsi react to new rivals and whether

their cooperation weakens in a more open market.

Finally, comparing other industries (like Apple and

Samsung) could test if the findings apply to other

markets.

In conclusion, this study helps show how game

theory can be used to understand competition and

cooperation in oligopolies. By fixing its limits, future

research can offer better ways to keep markets

balanced and fair.

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