Bitter Competition:

Versus

Group members
MVS Srikanth 1301-108
Sachin Jaiswal 1301-399
Prashant Gadepalli 1301-384
Mohana Vamshi Nivarthi ​ 1301-123
Ravikiran Dhulipala 1301-394
Daniel Guerra Maranto 14FRN-392
Game Setting
• Two players – NutraSweet (NS) and The Holland Sweetener Company (HSC)
• NS – Incumbent
• HSC – New entrant
• NS has a monopoly prior to HSC’s entry i.e. NS has a first mover advantage
• Product (aspartame) of NS and HSC are relatively identical (consumer is indifferent
about product attributes, concerns only about price)
• It is a game involving sequential moves
NS – Reasons for accommodation
• It is a complex multi-period game with an unknown amount of potential
players
• Price wars – forgone profits
• Existing contractual agreements (with soft drinks companies) will help in
segmenting the market – remaining markets will be left to HSC
• HSC capacity: 500 tons only compared to NS’s capacity of 7000 tons (which
is more than current world’s demand)
• No brand loyalty
• NS’s expiration of patent and entrant of new variants
• So, it is better to invest in R&D than to forgo profits in a price war
• Not an easy industry to enter because of huge capital costs
NS – Reasons for predatory pricing (price war)
• To develop reputation as a fierce competitor
• HSC moving up the learning curve (It may become more competitive in US
market after 1992)
• Increased buyer power
Calculations
Total cost = (711 – 142) * 10^6/(5650 * 2205) = $ 46 per lb. (approx.)
1986 NS financial data (Exhibit 4)

Net sales: $ 711 mn

Operating income: $ 142 mn
Demand of US, Europe and Canada markets in 1986: 5650 tons (Exhibit 1)

Variable cost = (COGS/Total sales) * Sales of NS = (4344/6879) * 711 = $36 per lb. (approx.)

SP = $ 70 per lb.
Profit per lb. = $ 24 (approx.)
Demand in Europe + Canada (in 1987) = 700 tons (an increase of 27% approx. from 1986’s
demand i.e. 550 tons – from Exhibit 1)
Game tree
COMPETITIVE

ENTER NS
HSC PREDATORY

STAY OUT
Calculations
NS – Monopoly scenario (HSC Don’t enter)
Total demand: 700 tons
Profit : $ 24 * 700 * 2205 = $ 37 mn (approx.)
HSC Enter & NS – competitive pricing
Total demand: 700 tons
Price points of NS & HSC: $ 60 per lb.
Market size : $ (60 – 46) * 700 * 2205 = $ 21.6 mn (approx.)

NS: (90% market share) – $ 19.5 mn (approx.)

HSC (10% market share) - $ 2.1 mn (approx.)
HSC Enter & NS – predatory pricing
Price points: NS: $ 36 & HSC: $ 36
NS Payoff: $ (36 - 46) * 700 * 2205 * 0.99 = -$15.3 mn
HSC Payoff: $ (36 - 46) * 700 * 2205 * 0.01 = -$0.1 mn
Game tree with payoffs
COMPETITIVE 2.1, 19.5

ENTER NS
HSC PREDATORY
-15.3, -0.1
STAY OUT
0, 37

Payoffs in $mn: (HSC, NS)

Game tree – Equilibrium path
COMPETITIVE 2.1, 19.5

ENTER NS
HSC PREDATORY
-15.3, -0.1
STAY OUT
0, 37

Payoffs in $mn: (HSC, NS)

Thank you