WIC and the Retail Price of Infant Formula
by Victor Oliveira
, Mark Prell
, David Smallwood
, and Elizabeth Frazão
Food Assistance and Nutrition Research Report No. (FANRR-39-1) 106 pp, June 2004
The Special Supplemental Nutrition Program for Women, Infants,
and Children (WIC) is an influential agent in the infant formula
market. WIC is a Federal program, administered by the U.S.
Department of Agriculture's Food and Nutrition Service, that
provides a package of supplemental foods (including infant
formula), nutrition education, and health care referrals to
low-income, nutritionally at-risk pregnant women, infants, and
children up to age 5. The Economic Research Service (ERS) estimates
that almost half of all infants in the United States are WIC
participants, and they consume about 54 percent of all formula sold
in this country.
Since 1989, State agencies that administer WIC have been
required to operate an infant formula rebate program as a means of
containing WIC costs. Under the rebate agreement, a WIC State
agency receives significant discounts from a formula manufacturer
in the form of rebates for each can of infant formula purchased by
WIC participants. In exchange, a manufacturer receives the
exclusive right to provide its formula products to WIC participants
in a State. In fiscal 2000, infant formula rebates nationwide
totaled $1.4 billion.
What Is the Issue?
Some observers have hypothesized that WIC and its rebate program
may increase significantly the retail infant formula prices faced
by non-WIC consumers, either through an impact on wholesale prices,
or through an effect on the retail markup. In 2000, Congress
directed ERS to report on how WIC and its rebate program have
affected the infant formula market. WIC and the Retail Price of
Infant Formula builds upon the resulting congressional report and
takes a more indepth look at the effects of WIC and WIC's rebate
What Did the Study Find?
Retail prices of infant formula vary widely by brand and
by geographic area. For example, the average price of 26
ounces of reconstituted milk-based powder formula marketed by PBM
Products in 2000 was $1.56 compared with $2.63 for the Ross brand.
The average price of Mead Johnson's milk-based formula was less
than $2 in Albany, NY, and greater than $3 in Chicago, IL.
Infant formula prices have increased faster than
inflation in recent years. Increases in retail prices of
infant formula from 1994 to 2000 varied by manufacturer and type of
formula. In nearly all cases, the average annual increase in the
retail price of formula exceeded inflation. In addition, in every
case the annual rate of increase in retail prices exceeded the
annual rate of increase in wholesale prices.
There is no evidence that WIC's infant formula rebate
program has resulted in a reduction of the number of infant formula
manufacturers, and thereby lessened price competition. In
1987, before the rebate programs were widely implemented, three
manufacturers-Ross, Mead Johnson, and Wyeth-accounted for 99
percent of the infant formula market. In 2000, three
manufacturers-Ross, Mead Johnson, and Carnation-accounted for 99
percent of the infant formula market.
If an infant formula brand is the WIC contract brand,
its retail price tends to be higher. A multivariate
regression analysis found that if a manufacturer's formula was the
WIC contract brand, the product had a modestly higher retail price,
holding other factors constant, such as wholesale prices. An
event-study analysis of retail prices before and after a change in
the WIC contract brand showed that after such a change, the retail
price of the new contract brand of formula increased more than that
of the old contract holder.
The size of a WIC program affected retail infant formula
prices. The greater the relative size of the WIC program
in a State, as measured by the ratio of WIC formula-fed infants to
non-WIC formula-fed infants, the greater the retail price of both
the WIC contract and the noncontract brands of formula, holding
other factors constant. Accordingly, States with a high percentage
of formula-fed infants in WIC had higher prices (other factors
equal), with the extent of the difference depending on type and
brand of formula consumed. For example, when moving from an area
where WIC infants account for half of all formula-fed infants to an
area where they account for two-thirds, a non-WIC family with a
typical 12-pound, formula-fed infant finds its monthly expenditures
(for milk-based formula) increase by about $3 to $5 for contract
brands of formula and by about $1 to $4 for noncontract brands.
Although WIC and its infant formula rebate program increased
infant formula retail prices modestly, a full discussion of the
price effects should consider the following:
- Over one out of every four participants in the WIC program
(i.e., almost 2 million people per month in fiscal 2000) is able to
do so because of State agencies' use of rebate money to run their
- Recent legislative changes provide USDA's Food and Nutrition
Service with enhanced control of the prices WIC vendors charge for
the contract brand of infant formula.
- WIC encourages mothers to breastfeed if possible, but most of
the infants in WIC receive infant formula through the program.
Increasing the prevalence of breastfeeding among WIC mothers would
lower consumer demand and result in lower retail prices of infant
- In most areas of the country, lower priced infant formulas are
now available to non-WIC consumers, and the number of these lower
priced alternatives is increasing over time.
How Was the Study Conducted?
The primary source of data on the retail prices of infant
formula was scanner information from a sample of supermarkets
located across the country (1994-2000). By using the scanner-based
retail sales data, it was possible to directly examine the infant
formula prices available to non-WIC consumers. Supermarket prices
of infant formula in a given geographic area depend on a number of
economic, demographic, and WIC program factors. Both an event study
methodology and a multivariate regression methodology were used in
order to isolate WIC-related price effects. The two different
analytical approaches produced comparable findings, making the
results stronger and more credible.