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.


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