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WIC Contract Spillover Effects

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  • Rui Huang

    () (University of Connecticut)

  • Jeffrey M. Perloff

    () (University of California, Berkeley)

Abstract

The three major infant formula manufacturers bid state by state to be the exclusive provider to poor families under the Women, Infants, and Children (WIC) program, and all three compete for non-WIC customers at grocery stores. Previous studies explained the low WIC prices and the higher retail prices as the result of price discrimination. We propose an alternative spillover model. Grocery stores, which supply both WIC participants and others, provide relatively large amounts of shelf space to the firm that wins the state-level WIC contract. Non-WIC customers, inferring from the large shelf space that the WIC brand is superior, are more likely to buy it. Because the contract winner benefits from a spillover effect in the lucrative non-WIC retail market, firms are willing to bid more aggressively for WIC contracts than in a price discrimination model. The spillover model is more consistent with the data than is the price discrimination model. We show that the retail price markup of the firm that wins the state WIC contract does not change when the contract is awarded, but that its shelf space increases in excess of the share of WIC customers.

Suggested Citation

  • Rui Huang & Jeffrey M. Perloff, 2009. "WIC Contract Spillover Effects," Food Marketing Policy Center Research Reports 118, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
  • Handle: RePEc:zwi:fpcrep:118
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    File URL: http://fmpc.uconn.edu/publications/rr/rr118.pdf
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    References listed on IDEAS

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    1. Amrouche, Nawel & Zaccour, Georges, 2007. "Shelf-space allocation of national and private brands," European Journal of Operational Research, Elsevier, vol. 180(2), pages 648-663, July.
    2. Oliveira, Victor & Prell, Mark A., 2004. "Sharing the Economic Burden: Who Pays for WIC's Infant Formula?," Amber Waves, United States Department of Agriculture, Economic Research Service, September.
    3. 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.
    4. 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.
    5. 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.
    6. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2004. "How Much Should We Trust Differences-In-Differences Estimates?," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 249-275.
    7. 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.
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    Cited by:

    1. 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.

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