The crucial entry barrier stemmed from the major companies’ direct give-away pro-
grams to hospitals and doctors. With 90 percent of mothers continuing to use the for-
mula brought home from the hospital, the companies enjoyed the ideal captive market.
Furthermore, the American Academy of Pediatrics allied itself with the dominant firms
to press for a prohibition on all advertising of infant formula. Doctors leading the acad-
emy argued that formula advertising discourages breast feeding. But Carnation and
Gerber advertised aggressively and insisted it was the only chance they had to bring
their products before the public. Carnation filed a lawsuit against the academy and the
formula producers, accusing them of conspiring to prevent it from marketing formula.
A Bristol-Myers memo revealed in a Florida lawsuit stated, “It is probably in our best
interests to forestall any form of consumer advertising.” The chief of Florida’s antitrust
division added, “I have walked into my pediatrician’s office and have had him try to
convince me not to buy Carnation even though it is cheaper.” Clearly, the direct give-
away program combined with impediments to advertising represented a formidable
barrier to entry.
What is the likely economic impact of competitive bidding for formula sales under
the Women, Infants, and Children (WIC) Program? As noted, most states allow vouchers
to be exchanged for any brand of formula. These states have seen company discounts
averaging $.50 per can. Formula companies lobbied strongly against winner-take-all bid-
ding, arguing that awarding the WIC contract to one bidder would restrict a family’s
choice of formula. (The companies went so far as to warn Texas officials that they might
no longer supply free formula to hospitals.) The experience in states with winner-take-all
bidding indicates why the companies resisted it. Competition was intense. With as much
as one-third of the total market up for bid, winning discounts averaged $1.00 per can.
Indeed, the winning discount reached a high of $1.50 per can in Michigan. (Here, the net
price of $.60 roughly matched estimated marginal cost. Thus, this bidding outcome
appears to have achieved the Bertrand equilibrium.) However, in other states, competi-
tive bidding offered more mixed results and much smaller discounts. Overall, competi-
tive bidding offers the advantage of lower prices and the real possibility of competition
by new entrants.^14
In the late 1990s, the three major formula producers reached a settlement with the
Federal Trade Commission in its price-fixing investigation. While admitting no wrong-
doing, the firms agreed to make reimbursements to formula customers in eight states.
Since 2000, a number of generic formula makers have made small market-share gains by
advertising their offerings and giving samples to doctors and mothers. Surprisingly, the
Academy of Pediatricians dropped their opposition to advertising, and, today aggressive
advertising (for better or worse) is the norm for all industry players.382 Chapter 9 Oligopoly(^14) Accounts of the history of the formula market, the advertising controversy, and experiments with
competitive bidding include B. P. Noble, “Price-Fixing and Other Charges Roil Once-Placid
Market,” The New York Times, July 28, 1991, p. C9, B. Meier, “Battle for Baby Formula Market,” The
New York Times(June 15, 1993), p. C1, M. Brick, “Makers of Generic Baby Formula Win Round in
Court,” The New York Times, May 2, 2001, p. C5, and G. Retsinas, “The Marketing of a Superbaby
Formula,” The New York Times, June 1, 2003, p. BU1.
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