Food Marketing Policy Center WIC Contract Spillover Effects

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. WIC Contract Spillover Effects Under the U.S. Special Nutrition Program for Women, Infants, and Children (WIC), each WIC state agency holds auctions where the low-bidder among the three major manufacturers of infant formula becomes the sole provider of formula to the state agency. WIC state agencies provide WIC participants—low-income families with babies and young children—with vouchers that they can use to obtain the winning brand of infant formula at no personal expense from participating grocery stores. In addition, all three manufacturing firms compete for retail sales to higher-income consumers, who pay the full retail price at grocery stores. Previous studies attributed the low prices to states WIC programs and high prices to wealthier consumers to price discrimination. In contrast, we believe that a spillover model better describes this market. We hypothesize that the winning WIC brand can using a WIC logo in its promotional material and gains additional shelf-space within grocery stores thereby increasing its credibility with nonWIC customers. As a result, the WIC contract winner becomes the dominant player in the nonWIC market. Consequently, the manufacturers are willing to bid a lower price for the WIC contract than in the price discrimination model, so that the price differential between the WIC and non-WIC price that can exceed the differential predicted by the classic price-discrimination model. We use grocery scanner data to empirically examine various implications of our model. We explicitly test the effect of winning the contract on the actual (not estimated) retail price markup and we find no evidence in support of such an effect. We also show how a change in the firm that holds the WIC contract affects the market shares of the winner and other firms. We start by describing the WIC program and explaining why institutional factors favor our spillover model rather than a price discrimination model. Next, we use some simple theoretical