Why Didn't Pepsi Want Coke's Formula to Be Stolen?

Last updated on: July 8, 2006 at 6:38 pm by Desh Kapoor

Why Didn't Pepsi Want Coke's Formula to Be Stolen? 2006-07-08T18:38:00-05:00 Desh Kapoor

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Here is an interesting newsof Pepsi coming out to help nab Coke officials who were trying to sell Coke formula to Pepsi. The question that everyone would have is WHY? Why would Pepsi not want the formula of Coke out – which could be a death knell for Coke? Is it just plain altruism?

The three, who include an executive administrative assistant at Coke, were charged with wire fraud along with stealing and selling trade secrets. Federal prosecutors in Atlanta say the trio sought to sell the information in deals worth as much as $1.5 million.

Federal prosecutors said Coke learned of the theft from Pepsi, which provided the company with a letter from an individual claiming to be a high-level Coca-Cola employee offering “very detailed and confidential information.”

“We just did what any responsible company would do. Competition can be fierce, but it also needs to be fair,” Pepsi spokesman Dave DeCecco said.

On hearing from Pepsi, Coke alerted the Federal Bureau of Investigation, which began an undercover operation.

“While this breach of trust is difficult for all of us to accept, it underscores the responsibility we each have to be vigilant in protecting our trade secrets,” Neville Isdell, chairman and chief executive of Coke, the world’s largest soft drink company, said in a memo to employees.

One would thing that Pepsi is being afflicted with Buffett-itis… but it is a pure business and economic decision, if anything! Here is the take from Freakonomics blog:

Let’s say that Pepsi knew Coke’s secret formula and could publish it so that anyone could make a drink that tasted just like Coke. That would be a lot like what happens to prescription drugs when they go off patent and generic drug companies come in. The impact would be that the price of real Coke would fall a lot (probably not all the way to the price of the generic Coke knockoffs). This would clearly be terrible for Coke. It would probably also be bad for Pepsi. With Coke now much cheaper, people would switch from Pepsi to Coke. Pepsi profits would likely fall.

So if Pepsi had Coke’s secret formula, they wouldn’t want to give it away to everyone. What if they instead kept it to themselves and made their own drink that tasted exactly like Coke? If they could really convince people that their drink was identical to Coke, then the new Pepsi-made version of Coke and the Real Thing would be what economists call “perfect substitutes.” When two goods are essentially interchangeable in consumers’ minds, that tends to lead to fierce price competition and very low profits. Neither Coke nor the Pepsi knockoff of it would be very profitable as a consequence. With the price of Coke lower, consumers would switch away from the original Pepsi to either Coke or the new Pepsi-made Coke knockoff, which would be far less profitable than original Pepsi anyway.

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