The ongoing shortage of baby formula has many desperate parents asking how, in 21st century America, we could find ourselves in such a dire situation over something so elemental. The proximate cause is the precautionary February shutdown of a manufacturing plant following the deaths of two infants from bacterial infections. However, the lack of resilience to such an isolated disruption is in large part the result of policy errors and politics dating back more than 30 years that have hindered the healthy functioning market forces.
Perhaps unsurprisingly, formula for infants is the most heavily regulated of any food item in the country, rivaling pharmaceutical products. That necessarily limits the number of firms with the size and scope to manufacture and distribute their products in the $4 billion U.S. market. In addition, the U.S. Food and Drug Administration process for obtaining certification is costly, cumbersome and bureaucratic, creating significant barriers to entry. As a result, a small number of players dominates the domestic market. Four firms control 80% of U.S. formula sales and the largest, Abbott Laboratories, owns nearly half the market. But regulation is only one factor in explaining industry concentration.
Fully half of all the formula sold in the United States is purchased by the U.S. Department of Agriculture and distributed through the Special Supplemental Nutrition Program for Women, Infants, and Children, commonly known as WIC. Only three manufacturers are authorized suppliers to WIC, and each state individually contracts exclusively with one of the manufacturers for its entire supply. That means the federal program confers monopoly power on a manufacturer within each state, sharply limiting competition. In addition, the WIC monopoly has been shown to carry a greater market share of the non-subsidized half of the market, as supermarkets tend to allocate precious shelf space to the dominant supplier.
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The potential for a supply squeeze resulting from the narrow market is hardly a surprise. The U.S. Department of Agriculture’s own Economic Research Service highlighted the risks of the hyper-concentration due to government-created oligopoly in a research paper in 2011.