Holland Sweetner versus Monsanto

Holland Sweetner versus Monsanto¹

Aspartame is a low-calorie sweetner 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. Serle & Co. first discovered aspartame in 1965; Serle received a patent for the product in 1970.  US regulators did not approve its use in soft drinks until 1983.  In 1985, Monsanto acquired Serle—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 Sweetner 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 US soft-drink market, which was to open up at the end of 1992.

Initially, Holland Sweetner was quite optimistic about capturing a large share of the US market.  To quote their vice present of marketing and sales in referring to Coke and Pepsi, “every manufacturer likes to have at least two sources of supply.”  To Holland Sweetner’s surprise, they never became a big player in the US 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 Sweetner was “left pretty much out in the cold.”

Envision a pricing problem between Monsanto and Holland Sweetner in 1992 that led to the Monsanto contract.  Assume (1) the cost to Holland Sweetner of entering the US market, $25 million, has been incurred; (2) Monsanto and Holland Sweetner simultaneously choose to quote either a high or low price to Pepsi and Coke for aspartame; (3) if both Monsanto and Holland Sweetner quote the same price, Pepsi and Coke contract with Monsanto because customers are familiar with theNutraSweet label—Holland Sweetner loses its initial investment; (4) if both firms submit a high price, Monsanto nets $300 million; (5) if both firms submit a low price, Monsanto nets $100 million; (6) if Monsanto prices high and Holland Sweetner prices low, Holland Sweetner nets $100 million (after the initial investment) and Monsanto nets $0.

1. Construct the strategic-form payoff matrix or this strategic pricing problem.  Find the Nash equilibrium.

The Nash equilibrium is for both firms to price low.  Pricing low is a weakly dominant strategy for Holland Sweetner.  It loses $25 million in all situations unless Monsanto prices high and Holland Sweetner prices low.  If Holland Sweetner prices low, it is in Monsanto’s interest to price low as well.

2. Now assume that the interaction is sequential where Holland Sweetner chooses to enter and if so they face the pricing problem in the second stage.  Should Holland Sweetner enter?

No.  They will lose $25 million if they enter and zero if they stay out.

3. Why do you think Holland Sweetner entered?  Were they just dumb or were there other potential considerations?

Ex post it appears to have been a mistake.  Entry, however, may have been a reasonable business decision ex ante given the information available at that time. Managers work with imperfect information. The managers at Holland Sweetener may have made some faulty assumptions or forecasts about consumer preferences for NutraSweet or Monsanto’s capacity to fill the entire order, etc. However, this does not mean they were “dumb.” One possibility, however, is that they didn’t think strategically and would have made a better decision if they had.

4. Prior to Holland Sweetner’s entry into the US market, Pepsi and Coke began deemphasizing the NutraSweet label on their cans and bottles.  Why do you think they did this?

They may have been acting strategically to reduce Monsanto’s power to extract a high price for NutraSweet (by reducing consumer demand for the sweetener). The soft drink companies would like to have consumers focus on their brands, not the NutraSweet brand.

5. Explain how Monsanto had a “first-mover’s advantage.”

Monsanto, by moving first was able to gain consumer acceptance. At equal prices the soft drink companies would rather deal with Monsanto than a new supplier. This gave them an advantage in the marketplace. Many would-be competitors may have realized that it was probably not in their interests to pay the fixed costs for a plant to enter. Monsanto was likely to compete to keep the contracts, and thus the new companies were unlikely to make money by entering. This first-mover advantage had the potential to help Monsanto make huge profits. Unfortunately for them, Holland Sweetener entered the market.

6. Pepsi and Coke were the big winners in this case.  Explain why.

They were able to use the threat of shifting to Holland Sweetener to negotiate a lower price with Monsanto. Monsanto may have made some profits on the deal because of their consumer acceptance. However, these profits are likely to be lower than if the soft drink companies did not have a credible source of alternative supply. (They could have started their own plants. However, they would have had to pay the fixed costs to enter production).

¹  Source:  A. Brandenburger and B. Nalebuff (1996), Co-opetition (Doubleday:  Garden City, NY).