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Spillover Mechanisms in the WIC Infant Formula Rebate Program

Author

Listed:
  • Rojas Christian A.
  • Wei Hongli

    (Resource Economics, University of Massachusetts Amherst, Amherst, MA, USA)

Abstract

This paper explores the WIC infant formula rebate program, which awards a single-source contract to the firm that offers the lowest net bid price. We study spillover mechanisms derived from instances when an infant formula manufacturer displaces another as a WIC supplier. The analysis compares three types of product segments: infant formula (where WIC is the main player), non-WIC infant formula, and toddler formula. We find that, immediately after the contract displacement, there is a significant increase in market share for all three types of formula for the winning manufacturer and that this effect increases overtime. These market share effects are likely explained by greater shelf space, better product placement, and the advantages of carrying WIC labels, as well as by a combined impact of recommendations from physicians and WIC participants. More interestingly, we observe that winning manufacturers increase the price of WIC and non-WIC infant formula over time. Back-of-the-envelope calculations show that the profit that the WIC-contract manufacturer derives from these spillovers in other product segments more than dominates the losses associated to selling the WIC product below cost. We also discuss the implications that the spillover effects have on displaced (former WIC) manufacturers.

Suggested Citation

  • Rojas Christian A. & Wei Hongli, 2019. "Spillover Mechanisms in the WIC Infant Formula Rebate Program," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 17(2), pages 1-14, November.
    • Handle: RePEc:bpj:bjafio:v:17:y:2019:i:2:p:14:n:6
    DOI: 10.1515/jafio-2018-0019
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    References listed on IDEAS

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    1. David E. Davis, 2012. "Bidding for WIC Infant Formula Contracts: Do Non-WIC Customers Subsidize WIC Customers?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 94(1), pages 80-96.
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    4. Oliveira, Victor & Frazao, Elizabeth & Smallwood, David M., 2011. "The Infant Formula Market: Consequences of a Change in the WIC Contract Brand," Economic Research Report 118020, United States Department of Agriculture, Economic Research Service.
    5. Oliveira, Victor & Frazao, Elizabeth & Smallwood, David M., 2010. "Rising Infant Formula Costs to the WIC Program: Recent Trends in Rebates and Wholesale Prices," Economic Research Report 59384, United States Department of Agriculture, Economic Research Service.
    6. Oliveira, Victor & Davis, David E., 2006. "Recent Trends and Economic Issues in the WIC Infant Formula Rebate Program," MPRA Paper 6657, University Library of Munich, Germany.
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