Works CitedGame Theory Mid-Semester ProjectSeagull Managers: Motoki Bandai, Raul Cardoso, Youngji Jeon, Stephanie WangSingle-Cup Coffee: Starbucks & Green MountainOverviewSingle-cup coffee system consists of two elements: a coffee brewer and a unique portion-pack system containing ground coffee and filter. The U.S. market is small but fast growing with a current base of $100 million[ CITATION Int11 \l 1033 ]. It is expected to triple or quadruple in size in the next few years. In the U.S., Green Mountain’s Keurig brewing system and K-Cups currently dominate the single-cup market with approximately 80% market share[ CITATION Gre11 \l 1033 ]. Kraft’s Tassimo, Sara Lee’s Senseo, Nestle’s Nespresso and Nescafe Dolce Gusto systems, and other small players make up the remaining 20% of the market. Under an exclusive agreement with Kraft’s Tassimo system, Starbucks had been a small player in the single-cup market. With the goal of expanding its presence in the single-cup market and the termination of Kraft’s partnership in March 2011, Starbucks had several options: 1) form a partnership with the market leader Green Mountain; 2) form a partnership with other brewers; 3) develop its own single-cup brewing system; 4) combination of two or more of the above options. Given the situation, Green Mountain had two options: 1) accept Starbuck’s deal; 2) reject Starbuck’s deal and seek partnership with Starbuck’s competitor (e.g. Peet’s Coffee). In this paper, we analyzed a sequential game of Starbucks vs. Green Mountain and the expected payoffs under different scenarios. The Players: Green Mountain Partnership with Coffee RoastersGreen Mountain first became a major player in the single-cup market in 2006 through the acquisition of Keurig, a leading manufacturer of single-cup coffee brewers. Keurig competed head tohead with Kraft’s Tassimo system. A key differentiator for Green Mountain/Keurig that led to its market domination was the variety of coffee selection available for the brewer. Through licensing deals with coffee roasters, Green Mountain signed numerous agreements to bring a wide range of coffees to K-Cups for the Keurig systems[ CITATION And05 \l 1033 ]. With partnership as its key competitive advantage and basis for growth, Green Mountain continued to seek new partners. On February 14th, 2011, rumors first began that Green Mountain was in talks with Starbucks for a partnership deal. On February 22nd, Green Mountain reached a deal with Dunkin’ Donuts. On March 2nd, 2011, Green Mountain was said to be in negotiations with Peet’s Coffee, which could’ve possibly prevented a deal with Starbucks given that they are close competitors.On March 10th, 2011, Green Mountain and Starbucks announced a strategic relationship for Starbucks branded K-Cup portion packs. As of March 2011, Green Mountain had secured partnerships with almost every major coffee brand including Folger’s, Tully’s Coffee, Caribou Coffee, Newman’s Organic, Dunkin’ Donuts, and Starbucks. The two major coffee brands that haven’t partnered with Green Mountain are Maxwell House and Peet’s Coffee. However, given that Maxwell House is ownedby Kraft and Starbucks is now Keurig’s exclusive “super premium” brand, these two partnerships are highly unlikely [ CITATION htt11 \l 1033 ].PatentsGreen Mountain owns 33 domestic and 73 international Keurig-related patents with additional patent applications in process. The two primary patents for K-Cup will expire in mid-2012. Green Mountain collects $0.064 for every licensed K-Cup sold [ CITATION Let10 \l 1033 ]. When the patents expire, any manufacturer will be able to make K-Cups without going through Green Mountain and paying licensing fees, leading to possible price wars. Green Mountain currently follows the "razorand blades" strategy of selling the Keurig brewers at very low margin and K-Cups at a premium. With patent expiration, it might need to reconsider this pricing strategy. StarbucksIn 2007, Starbucks signed a deal with Kraft to provide coffee exclusively for Kraft’s Tassimo single-cup system. Under the terms of the deal, Starbucks cannot put its coffee in Keurig’s K-Cups. Due to lackluster sales of the Tassimo system, Starbucks had a very small share of the single-cup market. In November 2010, Starbucks publicly announced its plan to terminate the deal with Kraft, which was finalized in March 2011. In February 2011, Starbucks announced its intention to expand its presence in the single-cup coffee market either through partnerships or with its own single-cup brewing system. This led to speculations that Starbucks was negotiating an agreement with Green Mountain. On February 15th, Starbucks announced an agreement with Courtesy Products, the nation’s leading provider of in-room coffee service to hotels. With this deal, Starbucks will provide ground coffees for use in Courtesy’s patented CV1 single-cup coffee system in up to 500,000 luxury and premium hotel rooms across the U.S. [ CITATION Sta11 \l 1033 ]. This deal acted as a confirmation of Starbuck’s intention to expand in the single-cup market. On March 10th, Starbucks announced its partnership with Green Mountain. Starbucks - Green Mountain PartnershipUnder the deal terms, Green Mountain agreed to make Starbucks its exclusive “super-premium” brand for Keurig, while Starbucks is allowed to sign single-cup deal with anyone. Green Mountain’s Keurig brewing machines will be distributed via Starbucks’ 11,000 domestic retail outlets, which represents a 50% increase over Green Mountain’s 23,000 current locations [ CITATION Did11 \l1033 ]. Starbucks K-Cups for Keurig brewer will be sold in grocery stores and retailers such as Wal-Mart, Macy’s, and Bed Bath & Beyond. Analysts estimate that the percentage of U.S. households thatown a Keurig will increase from 6% to 30% in the next few years, and that Starbucks will generate 1 million brewer sales and 600 million Starbucks K-Cup sales during the first year of the Green Mountain partnership [ CITATION htt11 \l 1033 ]. This partnership agreement does not rule out the possibility that Starbucks will make its own single-cup brewer in the future. Mental ModelsStarbucks optionsWe analyzed the pros and cons of the options for Starbucks. We defined the base case as Starbucks deciding to develop its own machine and entering the market in 2013. In this case, Starbuckswould have the upside of