Under the U.S. Special Nutrition Program for Women, Infants, and Children (WIC) program, the three major infant formula manufacturers compete for WIC supply contracts, state by state. Policy makers have been puzzled by the question of why the contracted WIC price is substantially lower than the retail (non-WIC) price. Our explanation is that winning the WIC contract is extremely valuable to a manufacturer because of a spillover effect: The increased retail shelf-space that is dedicated to the WIC brand and the WIC logo increases non-WIC sales. We identify this effect by showing the variations in market shares of winning and losing firms that follow WIC contract changes. Immediately after the contract change, there is an immediate increase in the market share of the WIC contract winner and an equal drop in the loser’s share because of new WIC purchases. Then, over an extended period, the spillover effect increases the winner’s share and decreases the loser’s share as retailers shift shelf space from the loser to the winner.
Review of Industrial Organization – Springer Journals
Published: Aug 2, 2013
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