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MVS Srikanth 1301-108

Sachin Jaiswal 1301-399


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 Enter & NS competitive pricing
Total demand: 700 tons
Price points of NS & HSC: $ 60 per lb.
Market size : $ (60 46) * 700 * 2205 = $ 21.6 mn (approx.)
NS: (90% market share) $ 19.5 mn (approx.)
HSC (10% market share) - $ 2.1 mn (approx.)



HSC Enter & NS predatory pricing
Price points: NS: $ 36 & HSC: $ 36
NS Payoff: $ (36 - 46) * 700 * 2205 * 0.99 = -$15.3 mn
HSC Payoff: $ (36 - 46) * 700 * 2205 * 0.01 = -$0.1 mn



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

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