Spillover Mechanisms in the WIC Infant Formula Rebate Program

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.