Game Theory and the Social Sciences
Introduction
Myong-Hun Chang
Department of Economics
Cleveland State University
G. D. Searle & Co.
• 1965: Serendipitous Discovery of
Aspartame at Searle
• 1970: Searle secures a patent on aspartame
– Patent Expiration Dates:
• 1987 in Europe and Canada
• Dec. 14, 1992 in the United States
• 1970: Seeks approval from the FDA for the
use of aspartame as a food additive
Monsanto’s Strategic
Considerations
• Capacity investment, pricing, and marketing
strategies in anticipation of the patent
expiration
• State of the markets (Europe, Canada, U.S.)
following the patent expiration
• Strategic vs Economic decisions
NutraSweet vs Holland
Sweetener Company
• Aspartame: low-calorie, high-intensity
sweetener
• Monsanto’s brand name: NutraSweet
• NutraSweet: key to the success of diet
Coke and diet Pepsi in the 1980s.
• July 1981: FDA grants permission for dry
use of aspartame as a food additive
• October 1981: Searle launches “Equal”
• December 1982: The NutraSweet Group
established as a separate operating division
of Searle
• July 1983: FDA approves “wet” use of
aspartame
• “Branded Ingredient Strategy”
• Summer 1985: Monsanto acquires Searle
Holland Sweetener Company
• Joint Venture between Tosoh Corporation
(Japan) and DSM (Dutch State Mines)]
• Created (1985) to challenge Monsanto’s
monopoly in the aspartame market
• 1986: HSC begins building an aspartame
plant in Geleen, the Netherlands
• Scale of Entry: Small 500-tonne plant
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HSC’s Strategic Considerations
• Expectation of the Post-Entry Market
• Two Scenarios
– “Normal Competition”
– “Price War”
HSC’s Conclusion
• Enter the European market at small scale
– Brand name Sanecta
• NutraSweet unlikely to engage in price
warfare
• Strategic vs Economic Considerations
Post-Entry Price Competition
• 1987: NutraSweet’s European patent
expires
• Holland Sweetener attacks the European
market
• Monsanto fights back (aggressive pricing)
• NutraSweet’s Exclusive Contracts with
Coke and Pepsi
• Huge Loss for HSC
• HSC’s appeal to the European courts
• HSC survives in Europe
– Pre-entry price: $70 per pound
– Post-entry price: $22 - $30 per pound
U.S. Market
• Patent expiration expected in 1992
• Jan. 1992: HSC announces a plan to
increase the annual capacity of its Geleen
plant
Monsanto’s Incumbent
Advantage
• Branding: Huge investments in creating the
brand identity
• Advertising: Estimated at $30 million
annually
• Cost Advantage: NutraSweet at a much
lower point on the learning curve than HSC
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Monsanto’s Deterrence Strategy
• New long-term contract with Coke and Pepsi
• Late 1989: NutraSweet announces a plan to
double the annual capacity of its Augusta plant.
The new capacity to come on stream in 1991.
• Sept. 1991: NutraSweet announces a plan to build
a plant in France (to come on stream in JulyAugust 1993.
• Feb. 1992: NutraSweet launches a $10 million
advertising campaign for Equal
• HSC’s Pre-Entry Considerations in 1986
– NutraSweet’s Reaction to HSC’s Entry in
Europe
Game-Theoretic Issues
• Who are the relevant players in this game?
• What were the options open to these
players?
• What were the players’ time frame for their
strategic planning?
• Long-term goal vs quick short-run profits
Game Theory
• Live-and-let-live Accomodation?
• Aggressive Price War?
• Science of Rational Behavior in Interactive
Situations
• Post-Entry Market Reality in Europe
– Does not guarantee winning
– Does provide general principles for thinking
about strategic interactions
– NutraSweet engaged in a price war
– What was NutraSweet up to?
• Deterrence in preparation for U.S. Competition?
• Bluff?
• Credibility?
Examples
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Tennis and Mixing Shots (mixed strategy)
GPA trap (prisoner’s dilemma)
Flat Tire (backward induction/coordination)
Mean Professors (commitment)
Roommates (brinkmanship/war of attrition)
Dating Game (manipulating information)
How to Use the Examples?
• Case Study Approach
– Parallels between the examples and the real-life
problems
– Drawback?
• Analytical Approach
– Constructs a theory of strategic action
– Drawback?
– Advantage?
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Game Theory and Strategic
Behavior
Main Lessons
• Taxonomy Matters
– Recognize the type of game you are in
• Equilibrium Matters
• “Games offer a classification of different
strategic situations and way to incorporate
and ‘audit’ many relevant elements
(players, payoffs, timing, information).”
– Colin Camerer (private correspondence)
– Know what types of outcomes are logically
possible in the game you are playing
• Change the Rules
– Manipulate the game structure to turn the
projected outcome in your favor
• Institutions Matter
– Know which rules you can/cannot change
• “Everything in strategy is very simple, but
that does not mean that everything is very
easy.” --- On War, Carl Von Clausewitz
• “Things should be made as simple as
possible, but not any simpler.” --- Albert
Einstein
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