There’s a lot of money in the advertising business and marketers are always trying to find opportunities to sell their company’s brand. Here’s a spin on the old prisoner’s dilemma. Hypothetically, let’s say there was going to be a grand football game and it’s projected to have the largest television audience in the world. Because of the popularity of this game, each advertisement spot costs $10 million.
Imagine you were in Muhtar Kent’s shoes. He’s the CEO of Coca-Cola and you had the final say in whether to advertise or not. Your chief marketing analyst is confident the company can expect to make $12 million in new soft-drink sales if Coke advertises in this upcoming sport event. That’s a pretty good financial outcome because it’s like making 20% return on your marketing equity. However, that is only true if your biggest competitor Pepsi Co doesn’t advertise too. Because if Pepsi also advertises in the same game then both companies are then only expected to make $6 million each in new sales. There is a limited amount of ad spots for the game and time is running out. You’re on the phone with the executives of the football committee and they need an answer from you right away. You don’t have time to call up Pepsi, or find out whether they are advertising or not. But you’re also certain that Pepsi doesn’t know if YOU’RE going to advertise or not and they’re faced with the exact same dilemma.
What would you do in a situation like this? If you say go ahead and if Pepsi does the same then both businesses will lose market capitalization, your personal net worth would take a hit, and other shareholders won’t like how you lost their money by being greedy. If you back down and don’t advertise, and neither does Pepsi, then nobody loses 🙂 But what if Pepsi did advertise ( ･_･)
|Coca-Cola Advertises||Pepsi Co Advertises||Possible Outcomes|
|Yes||Yes||Both Companies Lose $4 Million 🙁|
|Yes||No||Coke makes $2 Million|
|No||Yes||Pepsi makes $2 Million|
|No||No||Does not affect either company’s financials|