Managerial Economics & Organizational Architecture 6th Edition by James Brickley , Clifford Smith ,Jerold Zimmerman

Exercise 18

ANALYZING MANAGERIAL DECISIONS: Holland Sweetener versus Monsanto
Aspartame is a low-calorie sweetener marketed by Monsanto under the name of NutraSweet. It was a major impetus to the rapid growth of Diet Coke and Diet Pepsi during the 1980s and 1990s. A scientist at the G. D. Searle Co. first discovered aspartame in 1965; Searle received a patent for the product in 1970. U.S. regulators did not approve its use in soft drinks until 1983. In 1985, Monsanto acquired Searle-and with it a monopoly on aspartame. Monsanto's patents expired in 1987 and 1992 in Europe and the United States, respectively.
In 1986, Holland Sweetener was formed through a joint venture of Tosoh Corporation and Dutch State Mines. Its sole purpose was to challenge Monsanto in the aspartame market. It began by building a plant in the Netherlands to compete in the European market. The "big prize," however, was the U.S. soft-drink market, which was to open up at the end of 1992.
Initially, Holland Sweetener was quite optimistic about capturing a large share of the U.S. market. To quote their vice president of marketing and sales in referring to Coke and Pepsi, "Every manufacturer likes to have at least two sources of supply." To Holland Sweetener's surprise, they never became a big player in the U.S. market. In 1992, just before Monsanto's patent expired, Coke and Pepsi signed long-term contracts with Monsanto for the continued supply of NutraSweet. The big winners in this contract negotiation were Coke and Pepsi, who realized about $200 million a year in savings. Monsanto remained the major supplier to these companies, while Holland Sweetener was "left pretty much out in the cold." In 2006, Holland Sweetener announced it was exiting the aspartame business.
Envision a pricing problem between Monsanto and Holland Sweetener in 1992 that led to the Monsanto contract. Assume (1) the cost to Holland Sweetener of entering the U.S. market, $25 million, has been incurred; (2) Monsanto and Holland Sweetener simultaneously choose to quote either a high or lowprice to Pepsi and Coke for aspartame (3) if both Monsanto and Holland Sweetener quote the same price, Pepsi and Coke contract with Monsanto because customers are familiar with the NutraSweet label-Holland Sweetener loses its initial investment; (4) if both firms submit a high price, Monsanto nets $300 million; (5) if both firms submit a lowprice, Monsanto nets $100 million; (6) if Monsanto prices high and Holland Sweetener prices low, Holland Sweetener nets $100 million (after the initial investment) and Monsanto nets $0.
Prior to Holland Sweetener's entry into the U.S. market. Pepsi and Coke began deemphasizing the NutraSweet label on their cans and bottles. Why do you think they did this
Sources: A. Brandenburger and B. Nalebuff (1996), Co-opetition (Doubleday: Garden City; and DSM, Corporate Communications (2006), "DSM Press Release: Holland Sweetener Company to Exit from Aspartame Business," (March 30).