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Bidding for WIC infant formula contracts: Do non-WIC customers subsidize WIC customers?

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  • Davis, David E.

Abstract

Although the WIC food assistance program purchases over one-half of all US infant formula, I find the program has little impact on the prices paid by non-WIC customers. I estimate infant-formula marginal cost and find that it is low compared to price, implying large price-cost markups. But, the WIC program is not to blame. Instead large price-cost markups are likely due to customer’s price insensitivity. WIC’s impact on non-WIC customers comes through an increase in sales owing to a WIC “spill-over” effect. The WIC approved brand attains a prominence in the market that makes it a natural choice for non-WIC customers, which makes attaining WIC approval valuable to firms. Firms bid with rebates to attain exclusive WIC approved status which results in significant reductions in the cost of infant formula to the US government.

Suggested Citation

  • Davis, David E., 2011. "Bidding for WIC infant formula contracts: Do non-WIC customers subsidize WIC customers?," 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania 102457, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaea11:102457
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    References listed on IDEAS

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    1. 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.
    2. Oliveira, Victor & Prell, Mark A. & Smallwood, David M. & Frazao, Elizabeth, 2004. "Wic And The Retail Price Of Infant Formula," Food Assistance and Nutrition Research Reports 33873, United States Department of Agriculture, Economic Research Service.
    3. Davis, David E. & Leibtag, Ephraim S., 2005. "Interstate Variation In Wic Food Package Costs: The Role Of Food Prices, Caseload Composition, And Cost-Containment Practices," Food Assistance and Nutrition Research Reports 33811, United States Department of Agriculture, Economic Research Service.
    4. John Crespi & Richard Sexton, 2005. "A Multinomial Logit Framework to Estimate Bid Shading in Procurement Auctions: Application to Cattle Sales in the Texas Panhandle," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 27(3), pages 253-278, November.
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    Cited by:

    1. Rui Huang & Jeffrey Perloff, 2014. "WIC Contract Spillover Effects," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 44(1), pages 49-71, February.
    2. McLaughlin, Patrick W. & Saitone, Tina L. & Sexton, Richard J., 2013. "Non-Price Competition and the California WIC Program," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150783, Agricultural and Applied Economics Association.
    3. Volpe, Richard & Saitone, Tina & Sexton, Richard, 2014. "Cost Containment in the WIC Program: Vendor Peer Groups and Reimbursement Rates," Economic Research Report 183224, United States Department of Agriculture, Economic Research Service.
    4. David Davis, 2014. "Buyer Alliances as Countervailing Power in WIC Infant-Formula Auctions," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 45(2), pages 121-138, September.
    5. Oliveira, Victor & Frazao, Elizabeth & Smallwood, David, 2013. "Trends in Infant Formula Rebate Contracts: Implications for the WIC Program," Economic Information Bulletin 161130, United States Department of Agriculture, Economic Research Service.
    6. Hilary Hoynes & Diane Whitmore Schanzenbach, 2015. "US Food and Nutrition Programs," NBER Chapters,in: Economics of Means-Tested Transfer Programs in the United States, Volume 1, pages 219-301 National Bureau of Economic Research, Inc.
    7. Saitone, Tina L. & Sexton, Richard J. & Volpe, Richard J., III, 2012. "Markups and Promotional Patterns of California WIC-Authorized Foods," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124927, Agricultural and Applied Economics Association.
    8. repec:kap:qmktec:v:16:y:2018:i:1:d:10.1007_s11129-017-9191-z is not listed on IDEAS

    More about this item

    Keywords

    Price cost margins; WIC; Oligopoly; Food Assistance; Infant Formula; auctions; contracts; Consumer/Household Economics; Health Economics and Policy; Industrial Organization; L11; L113; I18; D12;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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