Prashant Gadepalli 1301-384 Mohana Vamshi Nivarthi 1301-123 Ravikiran Dhulipala 1301-394 Daniel Guerra Maranto 14FRN-392 Group members Bitter Competition: Versus Game Setting Two players NutraSweet (NS) and The Holland Sweetener Company (HSC) NS Incumbent HSC New entrant NS has a monopoly prior to HSCs 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 NSs capacity of 7000 tons (which is more than current worlds demand) No brand loyalty NSs 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 1986s demand i.e. 550 tons from Exhibit 1)
HSC NS Game tree ENTER STAY OUT COMPETITIVE PREDATORY Calculations NS Monopoly scenario (HSC Dont enter) Total demand: 700 tons Profit : $ 24 * 700 * 2205 = $ 37 mn (approx.)
HSC NS 0, 37 2.1, 19.5 -15.3, -0.1 Game tree with payoffs ENTER STAY OUT COMPETITIVE PREDATORY Payoffs in $mn: (HSC, NS) HSC NS 0, 37 2.1, 19.5 -15.3, -0.1 Game tree Equilibrium path ENTER STAY OUT COMPETITIVE PREDATORY Payoffs in $mn: (HSC, NS) Thank you