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Licensed Unlicensed Requires Authentication Published by De Gruyter December 14, 2018

Spillover Mechanisms in the WIC Infant Formula Rebate Program

Christian A. Rojas and Hongli Wei

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.


Note

Researchers own analyses calculated based in part on data from The Nielsen Company (US), LLC and marketing databases provided through the Nielsen Datasets at the Kilts Center for Marketing Data Center at The University of Chicago Booth School of Business. The conclusions drawn from the Nielsen data are those of the researchers and do not reflect the views of Nielsen. Nielsen is not responsible for, had no role in, and was not involved in analyzing and preparing the results reported herein.


A Appendix

Table 8:

Description of explanatory variables.

VariableDescription
Contract change= 1 for post WIC contract change time period, 0 otherwise
3 m<t<6 m= 1 for the first 3–6 months after WIC contract change, 0 otherwise
6 m<t<12 m= 1 for the first 6–12 months after WIC contract change, 0 otherwise
12 m<t<18 m=1 for the first 12–18 months after WIC contract changes, 0 otherwise
18 m<t<24 m= 1for the first 18–24 months after WIC contract changes, 0 otherwise
Average HH sizeAverage household size
Median HH incomeMedian Annual household income ($)
Poverty (%)Percentage of families have incomes below the poverty level
College (%)Percentage of the population have a bachelor’s degree
High school (%)Percentage of the population have a high school diploma
Mother labor (%)Percentage of mothers are in the labor force
Hispanic (%)Percentage of Hispanic population
White (%)Percentage of white population
Black (%)Percentage of Black population
Asian (%)Percentage of Asian population
Median ageMedian age
Children < 5 (%)Percentage of the population under 5 years of age
Number of birthsRatio of the number of live births in the current year/previous year
WIC ratio (%)Percentage of newborn babies subsidized by WIC

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Published Online: 2018-12-14

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