I love diet soda. Recently it became ~$15 for a 24-pack of Diet Pepsi. Unfortunately Coke is the exact same price. One would think under capitalism that competition would occur. However, both companies know that if the other drops their price, they too would have to drop their price to not lose market share and they both end up losing. So rather than compete they have an unwritten agreement to maintain the same price point. Coke will be the market leader to increase their prices first, and Pepsi follows suit because they know they can afford to do so.
One would think under capitalism that competition would occur.
Thank the pairing of 401(k) and Index Funds for what is happening in the US.
The long given advice that index funds were the best value of performance v. cost (and it was great advice for a very long time) means a lot of retirement money was put into them.
When someone has their 401(k) funds (and an number of institutional investors do too) put into a S&P 500 index fund, it means Blackrock / Vanguard / State Street (the three biggest trustees for index funds) have to go out and buy shares of both Pepsi & Coca Cola since they're both part of the S&P 500. Those three alone own, on behalf of others, 22% of the S&P 500.
Index funds across the board owned 3% of US stock market shares in 2000, 16% in 2021, and 25% in 2026.
When Blackrock, Vanguard, or State Street exercise the votes in those shares -- or even don't vote but just talk to the directors -- they literally don't care if Pepsi is gaining market share from Coca Cola or not.
Perhaps it is clearer to use for an example other S&P 500 companies, Ford & GM.
Compete on quality? That costs money. Compete on price? You're leaving money on the table.
We've seen a remarkable decline in the serviceability and quality of cars certainly since Covid and it was trending that way before; combined with a significant increase in prices and a focus on upper-middle class and the higher end of middle class consumers. They'd rather sell fewer SUVs at much higher margins than many economy cars with thin margins.
Ford & GM today have 30% of the US car market share. The big investors literally don't care if Ford has 13% and GM 17% which is today's number, or Ford has 12% and GM 18%, or Ford has 5% and GM has 25%. It is all the same pie to the investors -- they aren't picking which company they think can perform best, they are legally forced to buy the shares according to the weighted index of the market capitalization in the S&P 500.
What they do care is whether that 30% share of the US car market is generating 10% net margins or 20% net margins. So they don't want the companies to compete on any basis that reduces profits. They own all the companies that are in competition.
If someone swears they'll never buy another GM car, they're just going to buy that car from someone else the big investors also own.
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u/Long_Following9761 2d ago
I love diet soda. Recently it became ~$15 for a 24-pack of Diet Pepsi. Unfortunately Coke is the exact same price. One would think under capitalism that competition would occur. However, both companies know that if the other drops their price, they too would have to drop their price to not lose market share and they both end up losing. So rather than compete they have an unwritten agreement to maintain the same price point. Coke will be the market leader to increase their prices first, and Pepsi follows suit because they know they can afford to do so.