Sole-Source Contracts in WIC Infant-Formula Rebate Auctions and their Effect on Manufacturers’ Markups

David E. Davis ()

No 52009, SDSU Working Papers (in Progress) from South Dakota State University, Department of Economics

Abstract: The WIC program uses an auction to procure infant formula. Manufacturers bid on the right to be an agency’s sole supplier of formula by offering a rebate on formula sold through WIC. Rebates reduce costs, averaging about 90 percent of wholesale prices. However, because rebates are so large, some question the industry’s competitiveness. This paper develops a model for optimal rebates and shows that marginal cost can be estimated from model coefficients and program characteristics. Marginal cost estimates suggest large markups, and elasticities consistent with these markups suggest manufactures price on the demand curve where demand is nearly unit elastic.

Keywords: Price cost margins; WIC; Oligopoly; Food Assistance; Infant Formula; auctions; contracts (search for similar items in EconPapers)
JEL-codes: L11 L13 I18 D12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-agr and nep-com
Date: 2009-10
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Persistent link: http://EconPapers.repec.org/RePEc:sda:workpa:52009

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