It’s time for a random thought of the day! Today, I had a glass of Coca-Cola and couldn’t help but think about the vast market share that coca cola has attained over the years. In fact, the brand is so reputable and well known that virtually everyone knows it. The question I pose today is, why do they continue to advertise? Coca-Cola spends billions of dollars each year on advertising when virtually the majority of individuals know of the brand and has tasted it before. Wouldn’t it be better for for Coca-Cola to use this money on R&D instead to develop better products? To be honest, this has puzzled me for a long time.
It took me a while to put my mind around this, but when I actually thought about it, it became painfully obvious. Imagine if Coca-Cola completely stopped advertising. No more Television commercials, no more sponsorships, nothing. Pepsi, its main competitor and sworn nemesis would take that opportunity and gain massive sales by continuing its advertising. In a sense, its a “prisoner’s dilemma”. Pepsi and Coca Cola would both earn more profit by not advertising then if they both advertise. However, if one party advertises and the other doesn’t, the party that does not advertise will incur substantial cost. Therefore, there is an incentive for both parties to invest in advertising.
Of course, there are obviously many more reasons that would give incentives for a firm to spend on advertising despite their reputation. However, this is the the simplest and to me, most realistic example of why.