Final answer:
If the price of Pepsi is reduced by a major supermarket chain, the market demand for Coca-Cola is likely to decrease because consumers may switch to the cheaper alternative. This effect is based on the assumption that consumers view Pepsi and Coca-Cola as close substitutes.
Step-by-step explanation:
If a major supermarket chain reduces the price of Pepsi, this is likely to affect the market demand for Coca-Cola. In such a case, consumers may substitute Pepsi for Coca-Cola due to the lower price, assuming the products are seen as relatively interchangeable. Thus, the demand for Coca-Cola is likely to decrease since some Coca-Cola consumers may switch to the cheaper alternative.
When a product that is a close substitute for another decreases in price, the demand for the other product generally decreases as well. This is because consumers look for cost savings and are willing to switch to a similar product if it offers better value for money. This effect is typically observed in markets with high levels of competition and where there are few product differentiation factors between the competing items.
This scenario assumes that consumer preference for Pepsi and Coca-Cola is primarily driven by factors such as price and availability rather than brand loyalty or taste preference differences. If such non-price factors play a significant role, the impact of a Pepsi price reduction on Coca-Cola demand might be less pronounced.