Holland Sweetener versus Monsanto

Aspartame is a low-calorie sweetener 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 1980's and 1990s. A scientist at the G.D. Searle & Co first discovered aspartame in 1965; Searle received a patent for the product in 1970. U.S. regulators did not approve its use in soft drinks until 1983. In 1985, Monsanto acquired Searle - and with it a monopoly on aspartame. Monsanto's patents expired in 1987 and 1992 in Europe and The United States, respectively.

In 1986, Holland Sweetener 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 soft drink market, which was to open up at the end of 1992.

Initially, Holland Sweetener was quite optimistic about capturing a large share of the US market. To quote their vice president of marketing and sales in referring to Coke and Pepsi, "Every manufacturer likes to have at least two sources of supply."To Holland Sweetener's surprise, they never became a big player in the US market. In 1992, just before Monsanto's 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 Sweetener was "left pretty much out in the cold."

Envision a pricing problem between Monsanto and Holland Sweetener in 1992 that led to the Monsanto contract. Assume (1) the cost to Holland Sweetener of entering the US marketing, $25 million, has been incurred; (2) Monsanto and Holland Sweetener simultaneously choose to quote either a high or low price to Pepsi and Coke for Aspartame; (3) if both Monsanto and Holland Sweetener quote the same price, Pepsi and Coke contract with Monsanto because customers are familiar with the NutraSweet label - Holland Sweetener loses its initial investment; (4) 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 Sweetener prices low, Holland Sweetener nets $100 million (after the initial investment) and Monsanto nets$0. (7) if Monsanto prices low they will capture market share and earn $100 million, Holland Sweetener would earn nothing.

Answer the questions with explanation:-

1)Construct the strategic form payoff matrix for this strategic pricing problem. Place Holland Sweetener on the top row (like TragoCo in the text examples) for ease of grading. ( hand-draw the payoff matrix or can construct it on a computer) for example figure is below

TragoCo Set High Price Set Low Price Set $7 billion $9 billion High Price $8 billion $4 billion Boca-Cola Set $3 billion $4 billion Low Price $10 billion $5 billion