The Federal Trade Commission released a report on March 13 about the problems in the baby-formula market, and it confirms many of the details that free-market critics alleged had contributed to the baby-formula supply disruptions in 2022.
The FTC attributes to the WIC program a leading role in making the market brittle. “In effect, the United States has up to fifty individual state infant formula markets each dominated by a single manufacturer with market share that far exceeds the share of any manufacturer in the nationwide market,” the report says. “This outcome is primarily the result of the Child Nutrition and WIC Reauthorization Act, which requires single-supplier WIC contracts unless an alternative method can produce equal or greater savings.”
I wrote about how the WIC program harms the baby-formula market on May 10, 2022. Each state inks a contract with a single supplier of baby formula to make available to WIC recipients in its jurisdiction. About half of baby formula sold in the U.S. is covered by the WIC program. Formula companies lose money on the WIC sales and have to compensate by raising retail prices for the non-WIC buyers who actually pay full price. The higher formula prices contribute to calls to expand WIC eligibility further, creating a vicious cycle of soaring prices and lack of competition.
As the FTC points out, this is a great deal for the states. “In 2013, WIC rebates averaged 92% of the wholesale price of infant formula for brands participating in the WIC Rebate Program,” the report says. “This meant that the infant formula manufacturer on average retained 8% of the wholesale price of WIC infant formula after paying the rebate to the state on formula purchased through WIC.”
Why are manufacturers willing to nearly give away their products for free just to win the state WIC contract? Because winning the contract is essentially the only way to sell any formula in the state at all. The FTC gives an example from 2007, when California changed WIC suppliers. Here’s the graph of sales before and after the new contract:
That’s not just the market share for WIC sales. It’s the market share for all formula sales in California. “Dramatic changes in market share have likewise been observed across 29 other states,” the report says. The FTC says other studies have found that the company that wins the WIC contract can also expect higher sales of toddler formula, even though those are not covered by WIC.
So it’s a no-brainer for the formula companies to do everything they can to win these contracts. And it’s a no-brainer for states to make them, since they’re saving boatloads of money in administering WIC. But it’s bad for formula customers. It’s bad for non-WIC customers who have to pay high prices. And it’s even bad for WIC customers because it creates a market that can be destabilized by a bad storm in Michigan, which was part of the cause of the waves of shortages that happened in 2022.
Making matters worse, there is virtually no legal international competition in the U.S. baby-formula market, a fact that the FTC does not pay much attention to. “Legal” is an important word because there is a black market for foreign baby formula. Rather than allowing parents to purchase formula that’s perfectly safe — they’re buying formula approved by regulators in places such as the European Union, the U.K., Japan, and Australia — government blocks foreign competition with trade restrictions and other regulatory measures.
When government steps between customers and producers, price signals stop working as they should. The mutually beneficial dynamic by which competition between producers lowers prices and increases choices for customers does not have the chance to play out. Success in the market becomes dependent on closeness to government, rather than satisfying customers. The baby-formula market is a perfect illustration of this age-old story — but it’s hardly the only example.