Bitter Competition: the Holland Sweetner Company vs. Nutrasweet
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
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