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Holland Sweetner Versus Monsanto Suggested Answers
Holland Sweetner Versus Monsanto Suggested Answers
1
Source: A. Brandenburger and B. Nalebuff (1996), Co-opetition (Doubleday: Garden City, NY).
Sweetner-Low
Sweetner-Low
Holland
Holland
100
-25
100 0
Monsanto-Low Monsanto-High
Sweetner-High
Sweetner-High
Holland
Holland
-25
-25
300
100
Monsanto-High
Monsanto-Low
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.
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).