Recent Trends and Economic Issues in the WIC Infant Formula Rebate Program

Over half of all infant formula sold in the United States is purchased through the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC). Typically, WIC State agencies obtain substantial discounts in the form of rebates from infant formula manufacturers for each can of formula purchased through the program. The cost to WIC for each can of formula provided through the program has two components: (1) net wholesale price, which is equal to the wholesale price of formula minus the amount of the rebate; and (2) retail markup, which is equal to the retail price minus the wholesale price. This analysis suggests that retail markup accounts for most of the cost to WIC of infant formula in most States. However, both cost components have increased over time. The recent increase in both net wholesale price and retail markup coincides with the introduction of higher priced supplemented infant formulas. Conditions may change after the market adjusts to these new formulas.WIC; Special Supplemental Nutrition Program for Women, Infants, and Children; infant formula; rebates; net wholesale price; retail markup; wholesale price, Food Assistance and Nutrition Research Program, FANRP

ASYMMETRIC PRICE RELATIONSHIPS IN THE U.S. BROILER INDUSTRY

This study presents a testing methodology to analyze potential price asymmetries among the farm, wholesale, and retail levels of the U.S. broiler industry. Lag length, direction of causality and power of the integrators in the industry have allowed the wholesale price to become the center, causal price in the market. Asymmetric price transmissions, however, are limited. While downward movements in the wholesale price are passed on more fully to growers than increases in the wholesale price, only consumers in the North Central region of the U.S. share a larger portion of wholesalers' price increases than price decreases.Asymmetry, Broilers, Concentration, Granger causality, Price transmission, Demand and Price Analysis, Livestock Production/Industries,

Decision Stages and Asymmetries in Regular Retail Price Pass-Through

We study the pass-through of wholesale price changes onto regular retail prices using an unusually detailed data set obtained from a major retailer. We model pass-through as a two-stage decision process that reflects both whether as well as how much to change the regular retail price. We show that pass-through is strongly asymmetric with respect to wholesale price increases versus decreases. Wholesale price increases are passed through to regular retail prices 70% of the time while wholesale price decreases are passed through only 9% of the time. Pass-through is also asymmetric with respect to the magnitude of the wholesale price change, with the magnitude affecting the response to wholesale price increases but not decreases. Finally, we show that covariates such as private label versus national brand, 99-cent price endings, and the time since the last wholesale price change have a much stronger impact on the first stage of the decision process (i.e., whether to change the regular retail price) than on the second stage (i.e., how much to change the regular retail price)

Wholesale price discrimination with regulatory asymmetry

This paper studies the welfare effects of wholesale price discrimination between downstream firms operating under different regulatory systems. I model a monopolistic intermediate good market in which production cost differences between downstream firms may be due to regulatory or technological asymmetries. Price discrimination reduces regulatory distortions but may lower productive efficiency. Therefore, price discrimination increases welfare if regulation is the dominant source of cost differences. This provides a novel welfare rationale for exempting wholesale markets from the recent ban on geo-blocking in the EU

Consumption Inertia and Asymmetric Price Transmission

We propose consumption inertia as a new explanation for asymmetric price transmission. Inertia in consumer demand enlarges retailers’ gains in gross profits from raising prices in response to higher wholesale prices and reduces gains from decreasing prices in response to lower wholesale prices. Thus, consumption inertia can cause asymmetries in price transmission whereby retailers are more willing to change their prices, and change them more quickly, in response to wholesale price increases as opposed to wholesale price decreases.asymmetric price transmission, consumption inertia, market power, retail pricing, Demand and Price Analysis,

Consumer Search and Vertical Relations: The Triple Marginalization Problem

This paper shows that the double marginalization problem signicantly underestimates the ineciencies arising from vertical relations in markets where consumers who are uninformed about the wholesale arrangements be- tween manufacturers and retailers search for the best retail price. Consumer search provides manufacturers an additional incentive to substantially increase wholesale prices. Consequently, all market participants are worse o and we call this phenomenon the triple marginalization problem. We also show that, when the wholesale price is unknown, retail prices decrease and industry prof- its and consumer surplus increase in search cost, whereas the opposite is true when the wholesale price is known.

Wholesale Price Discrimination and Parallel Imports

We develop a model of vertical pricing in which an original manufacturer sets wholesale prices in two markets integrated at the distributor level by parallel imports (PI). In this context we show that if competition policy requires uniform wholesale prices across locations it would push retail prices toward convergence as transportation costs fall. However, these retail prices could be higher than those induced without restrictions on prices charged to distributors. Thus, the competition policy may not be optimal for consumer welfare.vertical restraints, parallel imports, market integration, price discrimination, competition policy

Wholesale Price Discrimination and Parallel Imports

We develop a model of vertical pricing in which an original manufacturer sets wholesale prices in two markets integrated at the distributor level by parallel imports (PI). In this context we show that if competition policy requires uniform wholesale prices across locations it would push retail prices toward convergence as transportation costs fall. However, these retail prices could be higher than those induced without restrictions on prices charged to distributors. Thus, the competition policy may not be optimal for consumer welfare.Vertical Restraints; Parallel Imports; Market Integration; Price Discrimination; Competition Policy

Wholesale price contracts for reliable supply

Firms can enhance the reliability of their supply through process improvement and overproduction. In decentralized supply chains, however, these mitigating actions may be the supplier's responsibility yet are often not contractible. We show that wholesale price contracts, despite their simplicity, can perform well in inducing reliable supply, and we identify when and why they perform well. This could explain the widespread use of wholesale price contracts in business settings with unreliable supply. In particular, we investigate how the performance of wholesale price contracts depends on the interplay between the nature of supply risk and the type of procurement process. Supply risk is classified as random capacity when events such as labor strike disrupt the firm's ability to produce, or as random yield when manufacturing defects result in yield losses. The procurement process is classified as control when the buyer determines the production quantity, or as delegation when instead the supplier does. Analyzing the four possible combinations, we find that for random capacity, irrespective of the procurement process type, contract performance monotonically increases with the supplier's bargaining power; thus, wholesale price contracts perform well when the supplier is powerful. However, this monotonic trend is reversed for random yield with control: in that case, wholesale price contracts perform well when instead the buyer is powerful. For random yield with delegation, wholesale price contracts perform well when either party is powerful

Vertical control of a distribution network - an empirical analysis of magazines

How does an upstream firm determine the size of its distribution network, and what is the role of vertical restraints? To address these questions we develop and estimate two models of outlet entry, starting from the basic trade-o¤ between market expansion and fixed costs. In the coordinated entry model the upstream firm sets a market-specific wholesale price to implement the first-best number of outlets. In the restricted/free entry model the upstream firm has insufficient price instruments to target local markets. It sets a uniform wholesale price, and restricts entry in markets where market expansion is low, while allowing free entry elsewhere. We apply the two models to magazine distribution. The evidence is more consistent with the second model where the upstream firm sets a uniform wholesale price and restricts the number of entry licenses. We use the model to assess the profitability of modifying the vertical restraints. A government ban on restriced licensing would reduce profits by a limited amount, so that the business rationale for restricted licensing should be sought elsewhere. Furthermore, introducing market-specific wholesale prices would implement the first-best, but the profit increase would be small, providing a rationale for the current uniform wholesale prices.