Bitter Competition: the Holland Sweetner Company vs. Nutrasweet

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Bitter Competition: The Holland Sweetner Company vs. NutraSweet (A) Jon Bain-Chekal

Introduction: The worldwide aspartame market has enjoyed patent protected financial prosperity since the early 1980’s. In 1986 the world demand for aspartame was 5,730 tons annually with future projected world demand reaching 10,000 tons annually, a 75% increase over 1986 demand. The Monsanto Corporation, the current owner of the rights to manufacture aspartame, under the brand name NutraSweet (NS), reported 1986 sales of $711 million. The estimated ROA was approximately 8%.1 With this being such an attractive industry, companies like Holland Sweetener Company (HSC) needed to determine whether or not to compete in the aspartame business. This paper will first analyze NS’s case for accommodating or deterring entry before turning to a discussion as to which strategy NS will actually choose. Given the above analysis the paper will briefly address what Holland Sweetener Company’s entry strategy should be. There are several industry factors that will affect how this game is played. First, the two versions of aspartame, as produced by HSC and NS, are relatively identical goods. This leaves the consumer indifferent to product attributes and only concerned with price. It is also assumed that geography is not a real strategic factor since shipping costs are so low. The shipping costs for a pound of aspartame average 15-20 cents.2 Compared to the 1986 market price of $70 per pound shipping costs only account for 0.002% of the market price, hardly a significant factor of concern even given NS’s large volume. Lesson 1 of game theory suggests, “you must [first] understand the payoffs and objectives of the other parties you are interacting with.”3 Therefore the next two sections explore NS’s potential objectives regarding competitor entry strategy. Thinking Ahead Reasoning backwards: Reasons for Accommodation It may seem counter intuitive why a monopolist would even consider accommodating a potential entrant into the market. Each entrant reduces market share and most commonly profits. Yet there are several important factors why NurtraSweet should seriously consider accommodating the entry of HSC. This is not a one shot game. It is a complex multi-period game with an unknown amount of potential players. Let’s assume for a minute that NS is able to induce HSC to exit with a price war. This strategy would be appealing as long as HSC was the only player. Since it is not, the game would not end. As long as the market is sufficiently attractive to entry there will be new potential entrants waiting to follow in HSC’s footsteps. If this is in fact the case, it is better for NS to accommodate one or two small 1 2

ROA=income/assets; 142/1883=8% HBS case, Bitter Competition: The Holland Sweetener Company Versus NutraSweet (A) 9-794-079, pg 3 3 Meaghan Busse, Lecture 9 & 10 Game Theory

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Bitter Competition: The Holland Sweetner Company vs. NutraSweet (A) Jon Bain-Chekal

entrants otherwise it will risk expending resources (i.e. forgone profits in a price war) to deter Holland Sweetener only to have a second company challenge NS. If there is enough potential entrants, this scenario could play out for years eventually depleting NutraSweet’s strength as well as eating up all future profits. There are several large food and chemical companies in the world that could relatively easily decide to move into the aspartame business consequently ensuring the plausibility of the above scenario. NS may consider utilizing its customer contractual relationships to segment the aspartame market. Considering that 80% of NS’s business is the diet soft drink market and many of these customers are committed to long-term contracts, NS may be able to capture the most lucrative and strategic customers for itself while leaving a small fringe market to HSC. Relegating new entrants to pick up the scraps at the low end may be a safe compromise to a price war. Currently NS has 20%...
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