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
ROA=income/assets; 142/1883=8%
2
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% more capacity than world
demand. Holland Sweetener is only considering adding 500 annual tons to the market or
approximately 7% (assuming they are able to produce at capacity). Giving up the less
lucrative part of the market may have other benefits as well. NS may be able to use HSC
as a strategic compliment because HSC, as a new entrant, will find the fringe market
appealing given its size and situation. So HSC will enter, but once it has entered it has an
incentive to deter other small potential entrants. By letting in one or two low-end players
the dynamics of the game change from dominant vs. fringe, to fringe vs. fringe. In this
game the price war does not affect the whole market, it only affects the smaller markets
of tabletop and food products, and HSC carries the cost burden of the price war. As I
mentioned in the introduction, I am assuming that the two versions of aspartame are
identical products. Instead this argument manipulates the rules of the game via quantity,
contracts, and size. The other way to try and differentiate a product, other than through
product attributes, is with a strong brand.
While NS has established a great brand, the actual value of that brand is in
question. NS scores high in market research tests on recognition, but does that actually
equate to high loyalty? For example aspartame’s largest market, diet soft drinks, the
consumer’s decision to buy is driven more by the downstream brand names like Diet
Coke and Diet Pepsi rather than product ingredients. As the Classic Coke debacle taught
us, consumers are driven to purchase soft drink products as a statement of
personality/identity or out of nostalgia rather than for product attributes like taste or
sweetness.4 Consequently while NutraSweet is a well known brand it does not engender
customer loyalty when faced with a comparable product. Consequently NS’s brand does
not afford them any significant advantages, especially in a price war game.

4
HBS case, Introducing New Coke, 9-500-067
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Bitter Competition: The Holland Sweetner Company vs. NutraSweet (A)
Jon Bain-Chekal

NutraSweet is quickly nearing the end of its product life cycle. There are two
significant product weaknesses the company must contend with: NS has a relatively short
shelf life in soft drinks and it is unstable when exposed to high temperatures. These
weaknesses leave aspartame susceptible to product substitutes like Hoechst’s
Acesulfame-K, which is heat stable and shelf stable or Pfizer’s new Alitame which is
heat stable and 2,000 times sweeter than sugar5. Hoechst’s Acesulfame-K is currently
sold in Europe. Pfizer applied for FDA approval in 1986 meaning that Alitame could be
approved for use as early as 1995. Both of these product’s potential entry into the US
market shortens NS’s window to regain profits after a price war. Not entering into a
price war and instead directing profits toward increased R&D would better serve NS.
There is also great uncertainty as to the industry cost structure. HSC claims that
its patented natural catalyst process would be less costly and more flexible than
NutraSweet’s6. NutraSweet is claiming that it has been able to cut its manufacturing
costs by 70% over the previous decade. As long as HSC’s pronouncement is sufficiently
credible, NS would want to adopt an accommodating strategy until the cost uncertainties
could be resolved.
Finally, the often-overlooked non-market strategy issues must be factored into NS
decision process. The threat of antitrust laws is an important reason for NutraSweet to
consider an accommodating strategy. NS does not want to find itself in a protracted and
costly legal battle. Allowing HSC to enter may provide sufficient evidence to prevent NS
from violating anti-trust law. Even though Holland is considering entering the European
and Canadian markets US trust law applies outside of the US if the companies are seen as
harming US consumers.7 NS would consider this only to preempt a potential entrant
from gaining bargaining power via the court system.

Is the future too soon? Reasons to deter

Theoretically a firm wants to deter entry if it believes that the NPV of future cash
flows will exceed the present cost of deterring entry. As mentioned above though
entering into a price war to deter entry is not necessarily a profit maximizing decision, yet
there are other important considerations that affect the revenue stream.
If NS expects a series of entrants vying for the aspartame market, it may want to
incur the cost of a price war with HSC to develop a reputation as a fierce competitor.
This reputation will hopefully forestall the consideration of other entrants thereby
allowing Monsanto to recoup lost profits after HSC exits.

5
HBS Case, Bitter Competition: The Holland Sweetener Company Versus NutraSweet (A) 9-794-079
6
HBS Case, Bitter Competition: The Holland Sweetener Company Versus NutraSweet (A) 9-794-079
7
Meaghan Busse, Lecture 6 Antitrust
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Bitter Competition: The Holland Sweetner Company vs. NutraSweet (A)
Jon Bain-Chekal

If HSC is allowed to enter the European and Canadian market, NS runs the risk
that HSC will grow and move up the learning curve. This could inadvertently increase
HSC’s ability to threaten NS in 1992 in the US market after the expiration of the patent.
NS may prefer to have HSC sitting on the sidelines for several years, missing out on any
production or marketing learning opportunities in order to retain NS’s knowledge
advantage when their prime market opens up in 1992.
HSC will increase buyer power. The largest aspartame customer, the diet soft
drink market which accounts for 80% of all sales, would be able to split its contracts
between the two manufacturers encouraging them to provide more favorable terms.
In the previous section I argued that the players costs structures are uncertain, yet
NS does have an advantage over HSC in size and experience. NS will have better
economies of scale, thereby being able to shift more fixed costs across all sales. The fact
that they have been in business for several years and have a culture focused on process
improvements means NS is further down the learning curve in the production of
aspartame. These two factors do not remove the uncertainty of the cost structures, but
they do give NS the upper hand. Depending on the company’s tolerance for risk this may
or may not be enough to convince them to enter into a price war.
Finally the historical entry and exit trends of the market are worth considering.
Relative to other industries the chemical and food processing industries have little entry.8
This trend reduces the threat of other potential players entering the game and raises the
effectiveness of a price war.

NutraSweet’s move
Given the above analysis of NurtraSweets potential options and interests HSC can be
relatively confident that NS will accommodate their entry. The key compelling factors
driving NS decision are: a) a homogenous product, b) with a short life-cycle due to
pending entry of new superior products, therefore insufficient time to recoup profits lost
in a price war, c) an uncertain cost structure comparison, d) a brand with high
recognition, but low loyalty, e) the looming threat of antitrust laws, f) the first mover
advantage.
Here is how the game will most likely play out. Figure 1 depicts a game tree in
which NurtraSweet’s strategic choices are to charge monopoly pricing or to use a price
limiting strategy to try and prevent HSC from even entering the market (for the purpose
of this paper I am going adopt Besanko’s argument that price limiting as a strategy is
flawed because it is not subgame perfect and therefore I will prune that option and

8
Besanko, Economics of Strategy, second edition, John Wiley & Sons, NY 2000, pg 328.
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Bitter Competition: The Holland Sweetner Company vs. NutraSweet (A)
Jon Bain-Chekal

continue with the example).9 Knowing that the current monopoly pricing is $70 per
pound, it is within reason to assume for the purposes of this example that the Stackelberg
price will be $60 and the Cournot duopoly price will be $50 per pound. Because the
European and Canadian markets are at a monopoly quantity, I am assuming that actual
demand is 10% higher (i.e. it will increase from 550 tons per year to 605 tons per year).
Table 1 summarizes useful sales and pricing information for this situation. Using the
fold-back method we start from the end of the tree and work backwards. In this case
HSC will clearly choose to enter because it will make $20 million vs. making $0 by not
entering. If HSC enters NutraSweet will price accommodate because $60 million is
optimal over $33 million estimated in the price war. For this case I reasoned that the
price accommodation would take the form of a Stackelberg game where the dominant
firm derives quantity based on the residual demand curve. The subgame perfect Nash
equilibrium is depicted by the bolded lines.
While the actual payoffs may vary, it is a plausible scenario which will help
predict NutraSweet’s strategy and subsequent moves. NutraSweet should accommodate
entry because of growing demand and the looming threat of technologically superior
substitutes for aspartame. Given these facts, entry is too attractive to potential entrants.
Even if there is only one entrant to this market, NS should not waste resources trying to
deter it, given the introduction of new and superior products.

HSC puppy dog ploy:

Knowing what NurtraSweet will do, HSC should use NS’s large size to its
advantage. HSC should focus on signaling to NS that it is not a large threat to
profitability. At least not as large a threat to profitability as a price war would be. In the
above example HSC would earn $20 million in sales or only 3% of NS’s worldwide
sales. It will then depend on the true cost structures of the firms and the relevant
minimum efficient scales (MES). If HSC’s improved production process has a MES at or
near 500 tons per year HSC can stay small. If in fact the MES is closer to NS’s 2000
tons, HSC will have to grow or it will go out of business.
So let the games begin!

9
Besanko, Economics of Strategy, second edition, John Wiley & Sons, NY 2000, pg 341.
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 Bitter Competition: The Holland Sweetner Company vs. NutraSweet (A)
Jon Bain-Chekal

Figure 1 Game Tree Form for HSC Entry

INCUMBENT: NutraSweet

Pmonopoly
Plimit

ENTRANT: HSC

IN OUT

INCUMBENT: NutraSweet

NS: 85 million
HSC: 0
Pwar Paccomodate

Please note that the conceptual theory of this argument was adapted from Besanko et.al, Economics of Strategy, second
edition, John Wiley
NS:&33million
Sons, NY, 2000. NS: 60 million
Table 1 PriceHSC:
and 33million HSC: 20
Profit Under Different million
Competitive Conditions
Market Structure NS % of Price NS Annual HSC Annual
Market Profit Profit
(millions) (millions)
Monopoly 100% $70 $85 $0
Cournot Duopoly—price 50% $50 $33 $33
war scenario
Stackelberg—dominant 75% $60 $60 $20
fringe accommodating
scenerio
It is assumed that the current sales in Europe and Canada do not reflect market demand due to the current
market structure being a monopoly which lowers the quantity below the socially optimal demanded.
Therefore a conservative estimate of a 10% increase in total sales in Europe and Canada is assumed (i.e.
demand will increase from 550 to 605 annual tons of aspartame).