The FTC Is Investigating Anti-Competitive Baby Formula Contracts. Bad Federal Policy Is To Blame.

If the FTC wants to know why there's such a notable lack of competition within America's baby formula market, it ought to ask other parts of the federal bureaucracy. 

The Federal Trade Commission (FTC) has caught onto the fact that there's a serious lack of competition among America's baby formula suppliers—but the agency seems to be looking in the wrong direction.

The Wall Street Journal reported Wednesday that the FTC launched a probe into possible anti-competitive practices within the lucrative state contracts awarded to formula manufacturers through the Women, Infants, and Children (WIC) program. The WIC program is funded with about $6 billion in federal grants, but states are responsible for managing the program. Each state picks a sole-source provider of baby formula to serve the state's entire WIC population.

Because nearly half of all formula sales are through the WIC program, whichever company wins those state-level contracts will effectively dominate the formula market within a given state. Studies by the U.S. Department of Agriculture (USDA) have found that the WIC-favored manufacturer also gains a huge competitive advantage in non-WIC purchases because they get extra shelf space and families become more familiar with their brand.

Sounds anti-competitive, doesn't it?

Oh, but that's not what the FTC seems to be investigating. Instead, the commission is worried that major formula manufacturers have "engaged in collusion or coordination with any other market participant regarding the bidding" for those state contracts, the Journal reports.

The formula that becomes eligible for the WIC program is sold at a steep discount, so the formula manufacturers are effectively trading off higher prices for a larger market share. If they can successfully collude to keep prices artificially high in an attempt to have their cake and eat it too, that puts taxpayers on the hook for higher costs in the WIC program—which means higher prices for parents trying to feed their infants.

The FTC's investigation will likely miss the more significant point: It's much harder for suppliers to collude when more suppliers are in the marketplace. A few companies colluding can be undercut by more competition, and their power over the market collapses.

Unfortunately, there are only three formula manufacturers who regularly bid for those WIC contracts: Abbott Laboratories, Nestlé Gerber, and Reckitt Benckiser.

If the FTC wants to know why there's such a notable lack of competition within America's baby formula market, it should look at the actual culprits: other parts of the federal bureaucracy.

Federal officials could guarantee more robust competition in the baby formula market by removing the counterproductive and protectionist regulations that effectively ban foreign formulas from being sold in the United States. In the wake of last year's shortage, there have been some regulatory changes aimed at making it easier for foreign-made formulas to be imported from manufacturers in Europe and the United Kingdom. But the absurdly high tariffs on imported baby formula mean the American market will continue to be dominated by a few domestic producers. The regulatory changes will mean little if foreign competition is priced out of the market by import taxes.

They could also change the rules of the WIC program to allow for greater competition by doing away with sole-source contracts. Indeed, when the baby formula shortage hit last year, the USDA temporarily loosened its rules so that state-run WIC programs could use their federal money to buy formulas outside of the existing sole-source contracts. That's a pretty clear signal that the government knows its own protectionist rules are limiting the markets' ability to operate—any rule that has to be discarded as soon as there's a crisis probably shouldn't exist in the first place.

Furthermore, the WIC rules make it difficult for new formula providers to get a foothold in the market and thus inadvertently help maintain the anti-competitive status quo. "The system undoubtedly saves U.S. taxpayer dollars but, when combined with WIC's sheer size, creates competition problems," wrote Scott Lincicome, vice president of general economics at the Cato Institute. That's because "only large, established producers have the capacity, capital, and regulatory expertise to navigate the WIC contracting process and to offer steep, up‐​front discounts on large volume government contracts."

If you want to prevent collusion and ensure that American parents have reliable access to safe and plentiful supplies of baby formula, the best option is to allow greater competition by stripping away protectionist regulations. But the Biden administration's FTC seems prepared to blame big businesses for the problems created by big government.