Bitter Competition

Take-aways
 The Game through 1991

1986 1988 1990

• HSC begins work on 500 ton • HSC lodges dumping complaint against
• Tosoh Canada files
aspartame plant NS with European Commission
complaint against
• HSC and Angus Fine • Hoechst files petition for FDA approval
NS with Canadian Bureau of
Chemicals complain to for use of acesulfame-K in soft drinks
Competition Policy
European Commission about • Canadian Competition Tribunal
• Hoechst gains limited FDA
NS’s contracting practices disallows certain of Nutrasweet’s
approval for acesulfame-K
• Pfizer files petition for FDA contracting practices
Approval of alitame • European Commission imposes anti-
dumping duties on NS

1985 1991

1987 1989
• European & Canadian use patents expire
• HSC and United
1985 • NS drops exclusivity clauses in European 1991
Sweeteners USA file suit in
• HSC Formed contracts with Coke & Pepsi • NS – Ajinomoto
Delaware to declare NS’s
• Monsanto • HSC begins selling aspartame out of pilot plant announce plans to build
patents invalid
Acquires • Miwon (South Korea) announces plans to enter 2,000 ton plant in
• NS announces plans to
Searle • J&J files petition for FDA approval of sucralose Gravelines, France
double annual capacity in
• Tosoh announces plans to import HSC
Augusta plant
aspartame into Japan
How effective a strategist has NutraSweet been
so far?

+ Branded ingredient and cost reduction strategies,

pursued in advance of patent expiration, generated a
significant competitive edge over any future
competitors

+ Decision to fight in Europe / Canada seemed to be

effective.
 No lasting entry by a third player
• Although prices have fallen, with a third player they may have fallen
more
 May have deterred HSC from expanding capacity sooner
How effective a strategist has NutraSweet been
so far? (2)

– Building a plant in Europe early on could have been a more

effective deterrent against entry there, since anti-dumping duties
could not have been imposed

–? Given that a European plant wasn’t built pre-1987, the decision

to build one there later effectively eliminated any chance of
reducing an implicit agreement with HSC to develop separate
“spheres of influence”

– The launch of SweetMate™ seems likely to trigger an expensive

reshuffling of market share in the tabletop segment. Possible
additional impact of cannibalizing Equal™ sales.
How effective a strategist has HSC been so far?

+ Small-scale entry created an incentive for NutraSweet

to cede part of the European / Canadian market rather
than initiate price war
 Problem: figure out a way to commit or signal intention to staying small

– HSC allowed itself to be bluffed into delaying

expansion
 Waited for resolution of the legal battle in Canada / Europe
before installing more capacity
 Decision-making about plant expansion at HSC:
Was NutraSweet bluffing?
Analysis Logic
First Level:  Small scale entry in U.S. makes accommodation

Single market / preferable for NutraSweet than fighting

Static
Second Level:  Potential profits in the future for NutraSweet more
Single market / than compensate for a period of low profits
Dynamic Price

Monopoly
Level
Price War Normal Competition

 But can NutraSweet really bring prices back up?

Third Level:  US market is ~10X the size of Europe / Canada
Multi-market /  Makes sense for NutraSweet to fight there if it
Dynamic delays HSC’s entry into the US
How effective a strategist has HSC been so far?
(2)

–? Better to commit to a larger facility in the beginning?

 Sinking the capacity to enable HSC to enter the US market
would have reduced NutraSweet’s temptation to fight in
Europe/Canada and may have deterred NutraSweet from
expanding.
 Also a larger facility would have yielded a lower cost-gap with
NutraSweet

? HSC’s best opportunities may lie outside the US.

 There Coke, as a dominant player, may benefit more from
having a second source (and suffer less from not being able
to use the NutraSweet brand)
How effective a strategist has HSC been so far?
(3)

+ HSC seems poised to shift the game over time to cost,

where they may have an edge over NutraSweet
through their patented enantiomer separation process

+ HSC should have viewed itself as selling “competition”

—offering a bargaining chip to Coke and Pepsi—
rather than aspartame.
 Given NS’s brand and cost advantages, HSC is a duopolist in
a weak position when it comes to selling aspartame
 However as the last hold-out in the aspartame business, HSC
is in a strong position when it comes to selling competition
 Challenge: get paid to play
 Demand fixed payment to enter / expand
 Demand a long-term contract from Coke
The Game between HSC and NutraSweet played
out on two levels

 Tactics
 Shaping the perceptions of the other player

 Value
 Securing added value, denying it to the other player
NutraSweet’s tactical strategy

 Dropped price sharply when HSC entered European

and Canadian markets
 Goal: shape perceptions of HSC managers about how tough
competition would be in Europe and in the US
 Starve HSC of funds
 Deny HSC learning-related cost reduction opportunities
 Effectiveness: delayed HSC’s entry into US market
 In games of this sort, the effectiveness of tactical
moves depends on how opponents interpret them.

Psychology Matters !
 What is added value?

YOUR ADDED VALUE =

Size of the Pie When Your Are IN the Game

Minus

Size of the Pie When Your Are OUT of the Game

Source: Brandenberger and Nalebuff (1996), Co-Opetition, p. 45

 NutraSweet’s added value strategy

 Investments in brand building

 Increase end-customers’ WTP  generate “pull”
 Decrease direct customers’ (Coke, Pepsi) willingness to
gamble by switching
 Emphasis on cost reduction

Enabled NutraSweet to continue to operate profitably

even after legal barriers to entry (patents) eroded.
What is HSC’s added value?

 Proprietary cost-reducing technology

 Primarily, HSC destroys NutraSweet’s added value

(and increases the added value of Cola makers)
 Thinking ahead, HSC might have captured some of this by
getting paid to play.
From the Where are They Now Files

 1992-2000
 1992:
 Pepsi and Coke re-sign exclusive deals to buy artificial sweetener
exclusively from Nutrasweet
 Holland Sweetener Company enters the U.S. market for aspartame
as Nutrasweet’s patent expires
 1996:
 Nutrasweet turns to Tony Bennett and actress Jamie Lee Curtis to
fatten its Equal brand's share of the flat $225 million artificial-
sweetener market
 Coca-Cola blames slow growth in diet soft drink market on
NutraSweet
2000-Present

 2000:
 Monsanto said it agree to sell its bulk NutraSweet business to
J. W. Childs Associates LP for $440 million.
 Present:
 NutraSweet is still maintains its position of leadership in the artificial
sweetener market.
 Both HSC and NutraSweet continue to pursue research on next-
generation sweeteners.
 Ticket Scalping Example, Part A

 “The Producers” starts in 5

minutes
 Outside the theater, there are
two scalpers with two tickets
each
 Five people who want to
attend the play, each willing
to pay $100
 What do you expect will
happen?

This example is courtesy of Prof. Meghan Busse.

Ticket Scalping Example, Part B

 “The Producers” starts in 5

minutes
 Outside the theater, there are
two scalpers with two tickets
each
 Four people who want to
attend the play, each willing
to pay $100
 What do you expect will
happen?
Ticket Scalping Example, Part C

 “The Producers” starts in 5

minutes
 Outside the theater, there are
two scalpers with two tickets
each
 Three people who want to
attend the play, each willing
to pay $100
 What do you expect will
happen?