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. Monsantos 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 softdrink 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 Sweetners surprise, they never became a big player in
the US market. In 1992, just before Monsantos 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.

Source:A.BrandenburgerandB.Nalebuff(1996),Coopetition(Doubleday:GardenCity,NY).

Holland
Sweetner-Low
100

Holland
Sweetner-Low
-25

100
Monsanto-Low
Holland
Sweetner-High
-25

Holland
Sweetner-High
-25

0
Monsanto-High

100
Monsanto-Low

300
Monsanto-High

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 Monsantos
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 Monsantos
capacity to fill the entire order, etc. However, this does not mean they were dumb. One
possibility, however, is that they didnt think strategically and would have made a better
decision if they had.

4.

Prior to Holland Sweetners 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 Monsantos 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-movers 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).