Lecture21_Predation_Econ121_Fall2010 (2)

Lecture21_Predation_Econ121_Fall2010 (2) - Lecture 21...

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Click to edit Master subtitle style  2/2/11 Lecture 21 Strategic Behavior: Predation Econ 121: Industrial Organization UC Berkeley Fall 2010 Prof. Cristian Santesteban
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 2/2/11 Overview Entry Deterrence (continued) Predation
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 2/2/11 Case Study: Nutrasweet Aspartame – low calorie, high- intensity sweetener Discovered by accident in 1965 by a Use of aspartame in soft drinks was approved by the FDA in 1983. Searle’s patent expired in 1987 in Europe and in 1992 in the U.S.
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 2/2/11 Case Study: Nutrasweet 1985 – Monsanto acquired Searle and the aspartame patent Monsanto sold the soft drink version of aspartame as Nutrasweet Huge market given the sales volume of Diet Coke and Diet Pepsi
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 2/2/11 Case Study: Nutrasweet 1986 – HSC, a joint venture between a Dutch and a Japanese company, began building an aspartame plant, in anticipation of Nutrasweet’s patent expiration. When HSC began selling the generic version of aspartame, Monsanto dropped the price of Nutrasweet from $70 to mid $20s per pound.
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 2/2/11 Case Study: Nutrasweet Was Monsanto’s reaction excessive given that HSC’s capacity was only 5% of the world market? Perhaps not if one considers that Europe is also a small fraction of the world market. The US market for aspartame is 10 times the size of the European market.
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 2/2/11 Case Study: Nutrasweet One interpretation: by fighting entry into a small market, it may “convince” potential entrants not to enter in other larger markets. Plus, production of aspartame is subject to a steep learning curve Monsanto cut costs by 70% over a period of 10 years Nutrasweet’s attack on HSC thus had
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 2/2/11 Case Study: Nutrasweet Likely as a consequence of Nutrasweet’s strategy, HSC delayed its expansion plans and was a weak competitor when the US market opened. And not to take any chances, Monsanto signed long term contracts with Coke and Pepsi just before the US patent expired.
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 2/2/11 Contracts as Barriers to Entry Why would Coke and Pepsi sign such a contract with Monsanto? Is it not better to let new entrants
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Lecture21_Predation_Econ121_Fall2010 (2) - Lecture 21...

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