Abstract
Under the U.S. Special Nutrition Program for Women, Infants, and Children (WIC) program, the three major infant formula manufacturers compete for WIC supply contracts, state by state. Policy makers have been puzzled by the question of why the contracted WIC price is substantially lower than the retail (non-WIC) price. Our explanation is that winning the WIC contract is extremely valuable to a manufacturer because of a spillover effect: The increased retail shelf-space that is dedicated to the WIC brand and the WIC logo increases non-WIC sales. We identify this effect by showing the variations in market shares of winning and losing firms that follow WIC contract changes. Immediately after the contract change, there is an immediate increase in the market share of the WIC contract winner and an equal drop in the loser’s share because of new WIC purchases. Then, over an extended period, the spillover effect increases the winner’s share and decreases the loser’s share as retailers shift shelf space from the loser to the winner.
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Notes
A competing theory is that the WIC and its rebate program separates consumers in two markets so that they can now price discriminate. For example, Hal Varian, www.wwnorton.com/mip/ime/varian/24a.htm, discussed a price-discrimination model where the removal of the low-income consumers from the out-of-the-pocket-market results in a higher non-WIC price. Similarly, Post and Wubbenhorst (1989) argued that WIC vouchers make WIC consumers price insensitive so that the overall demand is much less price sensitive; hence profit-maximizing retailers raise their prices. Oliveira et al. (2004, pp. 2–3) reported this conclusion. However, this explanation of price discrimination across states is implausible because each manufacturer sets a single national wholesale price once a year and does not change it at the time that new state contracts are signed.
In 2000, the three major manufacturers produced 99 % of all infant formula: Mead Johnson had 52 % of the market, Ross had 35 %, and Carnation had 12 % (Oliveira and Prell 2004).
See, for example, http://canigivemybaby.com/different-brands-of-formula.
Most states issue ready-to-use (RTU) infant formula only to WIC participants with specific conditions, such as the unavailability of sanitary water supply, the inability of the caretakers to dilute formula, or the unavailability of comparable substitute in other formats, so relatively few people are affected. We do not know which firm provides RTU infant formula through WIC in most states. Even if we had this information, we could not conduct an analysis similar to that for powder because most stores did not carry at least one of the major brands for extended periods.
In the following analysis, we excluded New York. New York had a different type of WIC contract than did the other states such that it did not have a single winner prior to the sample period. Therefore, in contrast to the other 15 states, it was not clear whether WIC contract changed hands in this state.
These states are Georgia, Missouri, Pennsylvania, Texas, Tennessee, Minnesota, Iowa, and Florida. The seven states in the sample in which there were no WIC contract shifts were California, Colorado, Illinois, Massachusetts, Michigan, Washington, and Wisconsin.
Atlanta; Cedar Rapids, Iowa; Houston; Kansas City, Missouri; Midland, Texas; Minneapolis/St. Paul; Philadelphia; Pittsburg; Rome, Georgia; St. Louis; Tampa/St. Petersburg.
Missouri went through two contract changes during the sample period. The first change became effective on October 1, 1997, when Carnation replaced Mead. This contract was 1-year long with two 1-year renewal options, according to our conversation with Annie Siu-Norman, a veteran consultant at the WIC agency in Missouri. The WIC agency at Missouri chose not to renew the contract after 1 year and opened bids again in July 1998. Mead won the contract back from Carnation, and this change was effective on October 1, 1998.
The signs of the coefficients on the various time trend and contract variables remain the same if we drop this interaction term.
We also experimented with other time interval dummies, such as \(7 = t = 12,\, 13 = t = 18,\, 19 = t = 24,\, t > 24\), and found qualitatively similar results.
To reduce the size of the table, we do not show the size interaction with the time dummy variables. However, those results are similar to the time trend models.
To investigate the effects of store size on the size of the spillover effect, we repeated the simulation for the sample’s largest store and for the sample’s smallest store. The plots are qualitatively similar across store sizes, but the spillover effect is smaller, the larger is the store (not shown, in the interests of conserving space, but available from the corresponding author). The average spillover effect from the 3rd biweek to the 37th biweek is only a quarter of the size in the largest store (7 percentage points) as in the smallest store (27 percentage points). This result is consistent with what we expect, given that the marginal cost of shelf-space is higher in small stores than in large ones, hence the WIC brand’s shelf-space advantage is greater in small stores.
The Chi-squared statistics of the Wald tests are 0.00 and 0.61 for the contract change and the time trend respectively, or 0.03 for both variables jointly.
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Acknowledgments
This study was produced under cooperative agreement 43-3AEM-5-80035 with the U.S. Department of Agriculture. We are grateful to our colleagues, particularly David Davis at South Dakota University, and Linnea Sallack at the U.S.D.A. ERS, for information and helpful comments on our earlier research proposals. We thank David Betson and Betsy Frazao for very helpful comments. We benefited substantially from comments by two referees and the editor, Larry White.
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J. M. Perloff is a member of the Giannini Foundation.
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Huang, R., Perloff, J.M. WIC Contract Spillover Effects. Rev Ind Organ 44, 49–71 (2014). https://doi.org/10.1007/s11151-013-9397-5
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DOI: https://doi.org/10.1007/s11151-013-9397-5