Question

Monsanto, the maker of Nutrasweet, owned the patent to aspartame, the official name of the sweetener. In 1987 Monsanto's patent expired in Europe, allowing other firms to produce aspartame under other brand names.

a. What impact do you think this had on the market for aspartame and Monsanto's profits? Comment on the change in market structure and market power.

b. What are some barriers to entry that Monsanto could use to keep its market power? Explain each one.

Answer 1

a. Due to the expiry of the patent, the market for aspartame became competitive. Monsanto lost the exclusive right to produce aspartame, and other firms were now legally allowed to copy the formula.

Due to the entry of new firms, competition levels rose significantly, and the market moved towards highly competitive levels (though not perfectly competitive). In real world terms, it could be termed as between perfectly and monopolistically competitive.

Monsanto lost its market power, and the profits were now shared between all the firms in the market.

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b. What are some barriers to entry that Monsanto could use to keep its market power? Explain each one.

The firm may launch its own generic low cost version of sweetener, before the existing patent expires. This will give it time to adjust to the market, and customers may also be retained.

Another option is for the firm to apply for additional patents much before the first patent expires. A series of patents will protect the firm from competition. The timing and nature of these patents is very important.

The firm can also attempt to keep its formulation as a trade secret, by making it impossible to replicate.

The firm may also revise the "Nutrasweet" brand, by adding some features. Strong advertising much before the expiry of the patent, will maintain customer base. This may also include loyalty programs and tie-ups with doctors.

In anticipation of the new entrants, the firm can lower its prices or offer discounts and other concessions to the customers.

The firm can merge with, or acquire, or tie-up with potential competitors, and thus remain as a monopoly.