CHINA'S INCOME DISTRIBUTION OVER TIME: REASONS FOR RISING INEQUALITY

We estimate China's rural, urban and overall income distributions using grouped data from 1985-2001. We show how the distributions evolve as well as examine trends in welfare indices. We find the growing rural-urban income gap and increases in inequality within either sector have been equally responsible for overall inequality growth.Consumer/Household Economics,

WIC Contract Spillover Effects

The infant formula rebate program of the Special Nutrition Program for Women, Infants, and Children (WIC) requires each state to hold an auction where the low-bidder among the three major manufacturers of infant formula became the sole provider of formula to the state, which issues WIC voucher to low-income WIC participants. Using these WIC vouchers the WIC consumers can get contract brand infant formula for free from participating grocery stores or directly from the state. The WIC agencies then reimburse the retailers for the full retail price of the formula purchased by WIC consumers. Since the rebate program started, the wholesale prices of infant formula have increased markedly. The infant formula industry is highly concentrated, with three firms accounting for more than 90% of market share. Since the start of the rebate program, Congress has been concerned with the program's effects on non-WIC consumers. Congress mandated several studies of this issue by the GAO and USDA. Despite these government and other academic studies, there is no consensus on a theory as to how the rebate program affects non-WIC consumers. Empirical studies have not resolved this issue due to a lack of data. The goal of this study is two-fold. First, in contrast to earlier studies that describe firms' behavior as price discrimination, we present a theoretical model based on spillover effects. We refer to increases in non-WIC demand for the WIC brand due to its WIC brand status as a spillover effect. A firm will submit an extremely low bid because the WIC contract winner brand gains substantial additional sales and becomes the dominant player in the non-WIC market. The resulting differential between the WIC and non-WIC price may exceed that of the pure price-discrimination model. Second, we use widely available scanner data to test our hypothesis and estimate the magnitude of the spillover effect. Methodology Our theory is based on three important characteristics of this market. First, the wholesale prices do not change substantially before and after a firm wins the WIC contract in a state. Second, all three major firms set a national wholesales price annually. Third, the share of the WIC contract winner increases dramatically after a it takes over a contract. Hence, a price discrimination model where firms set wholesales prices to each retailer or state and adjust wholesale prices with every contract change is not consistent with these stylized facts. We solve for the oligopolistic equilibrium uniform prices (in the absence of a WIC rebate program) and compare those to the equilibrium prices under WIC if the firms could price discriminate or where they cannot price discriminate and there are spillover effects. Possible channel of spillover could be simply change in shelf space allocation in grocery stores. We show that with a large spillover effect, a firm is willing to bid more aggressively so as to be able to charge higher prices to the non-WIC market. As a result, the differential between the WIC and non-WIC price may exceed that of the price discrimination model. We estimate the magnitude of the spillover effects. It would be straightforward to investigate spillover effects if we had data that distinguishes WIC and non-WIC sales. However, such data are not available. Therefore to identify the spillover effect, we explore the variation over time in states where the WIC contract has changed between firms during our sample period. Our empirical strategy is based the following rationale. After the WIC contract change between brands, WIC participants, who receive the current WIC brand for free, immediately switch from the loser to the winner brand. Consequently, stores must provide more shelf-space to the contract winning brand. Non-WIC consumers may be influenced by shelf-space allocation and are more likely to choose the contract winning brand as a result. However, parents do not like switching brands for fear that their babies will reject the new brand. Thus, only new non-WIC consumers are influenced by the shelf-space allocation. Consequently, the non-WIC spillover effect occurs slowly over time as parents with new babies enter the market and those with older babies exit. Are idea, then, is to identify the non-WIC spillover effect through a gradual adjustment pattern following a contract change. The panel structure of our data also allows us to exploit the variation in share changes when different firms win or lose the contracts in various cities. Using IRI scanner data from year 1997 to year 1999 from 11 cities in 7 states where WIC contract change occurred during the period, we estimate a multinomial logit model with dependent variables being the shares of the WIC contract winner, loser and the remaining brands, and independent variable are the time elapsed since the contract change, state birth rates, and firm and state fixed effects. We confirm that there is an instantaneous switch in shares after the contract change followed by a spillover effect that gradually increase over time until it too is substantial. Potential for generating discussion The WIC program provides formula to half of all U.S. infants. Despite the importance of this rebate program, no consensus exists on how this program affects non-WIC consumers, either theoretically or empirically. For example, the U.S. GAO (1998) argued based on simulations that spillover effects could not be substantial in the WIC infant formula market. Thus our theory and confirming empirical evidence contrast substantially with earlier studies. Reference: U.S. General Accounting Office. 1998. Food Assistance: Information on WIC Sole-Source Rebates and Infant Formula Prices, Report to the Chairman, Committee on the Budget, House of Representatives, GAO/RCED-98-146.Food Consumption/Nutrition/Food Safety,

Data Needs for Consumer and Retail Firm Studies

Growing concentration in the retail grocery sector raises new economic questions that are difficult to answer with existing data sources. In part because of concentration in the retail data industry as well the fact that these data are not primarily collected for academic research purposes, currently available grocery-level datasets are extremely expensive, not properly randomized, and lack critical information. We discuss the increase in concentration at the retail level, concentration in data provision, data needs for a number of important research areas, and possible solutions.Agribusiness, Consumer/Household Economics,

China's Income Distribution and Inequality

We use a new method to estimate China’s income distributions based on publicly available interval summary statistics from China’s largest national household survey. We examine rural, urban, and overall income distributions for each year from 1985-2001. By estimating the entire distributions, we can show how the distributions change directly as well as examine trends in traditional welfare indices such as the Gini. We find that inequality has increased substantially in both rural and urban areas. Using an inter-temporal decomposition of aggregate inequality, we determine that increases in inequality within the rural and urban sectors and the growing gap in rural and urban incomes have been equally responsible for the growth in overall inequality over the last two decades. However, the rural-urban income gap has played an increasingly important role in recent years. In contrast, only the growth of inequality within rural and urban areas is responsible for the increase in inequality in the United States, where the overall inequality is close to that of China. As a robustness check, we show that consumption inequality (which may be a proxy for permanent income inequality) in urban areas also rose considerablyincome distribution, inequality, maximum entropy

Milk Marketing Order Winners and Losers

Determining the impacts on consumers of government policies affecting the demand for food products requires a theoretically consistent micro-level demand model. We estimate a system of demands for weekly city-level dairy product purchases by nonlinear three stage least squares to account for joint determination between quantities and prices. We analyze the distributional effects of federal milk marketing orders, and find results that vary substantially across demographic groups. Families with young children suffer, while wealthier childless couples benefit. We also find that households with lower incomes bear a greater regulatory burden due to marketing orders than those with higher income levels.Milk, marketing orders, dairy industry regulation

Milk Marketing Orders: Who Wins and Who Loses?

Livestock Production/Industries, Marketing, Q13, Q18,

Milk Marketing Order Winners and Losers

Do milk marketing orders affect various demographic groups differently? To answer this question, we use supermarket scanner data to estimate an incomplete demand system for dairy products. Based on these estimates, we simulate substitution effects among dairy products and the welfare impacts of price changes resulting from changes in milk marketing orders for various consumer groups. While we find little difference in own- and cross-price substitution elasticities of demand, the welfare effects of price changes vary substantially across demographic groups, with some losing and others winning from this government program. Families with young children suffer from marketing orders, while wealthier childless couples benefit. Additionally, we find that households with lower incomes pay a larger percentage of their income due to marketing orders than those with higher income levels.Consumer/Household Economics,

Effects of the private-label invasion in food industries

Using supermarket scanner data, we test a variety of hypotheses from trade journals about the invasion of private-label food products. According to conventional industry wisdom, name-brand firms defended their brands against new private-label products by lowering their prices, engaging in additional promotional activities, and increasingly differentiating their products. Our empirical evidence is inconsistent with these beliefs.private label; entry; price; promotional activity; differentiation; supermarket

Effects of Increased Variety on Demand, Pricing, and Welfare

We use order statistics to analytically derive demand functions when consumers choose from among the varieties of two brands—such as Coke and Pepsi—and an outside good. Soft-drinks have no price variability across varieties within a brand, so traditional demand systems (e.g., mixed logit) are not identified. In contrast, our demand system is identified and can be estimated using a nonlinear instrumental variable estimator. Our demand functions are higher-order polynomials, where the polynomial order is increasing in variety. Because these demand curves have convex and concave sections around an inflection point, firms are more likely to respond and make large price adjustments to increases in cost than to comparable decreases in costs. We compare the profit-maximizing number of varieties within a grocery store to the socially optimal number and find that consumer surplus and welfare would increase with more variety