Jun 9, 2022

Competition Policy and the Infant Formula Market

A further exploration of what’s behind the shortage.
Alden Abbott Senior Research Fellow, Giorgio Castiglia

The baby formula shortage crisis has now caused turmoil for families with vulnerable infants for months on end. With fingers crossed, we may be entering a period of relief soon as the Abbott Laboratories plant is cleared to reopen and more formula comes in from Europe.

However, the challenge of how to avoid future disruptions will remain. The shortage has left stressed-out parents wondering how in the world we ended up in such a situation. In a recent article in The National Interest, we explored the various reasons why the formula shortage became as bad as it did. Though everything we argue there still stands, more information has come to light, and we seek to update and expand on our discussion here. Specifically, our argument pertains to the prevailing state of competition in the market for infant formula.

The trouble began when four infants became ill after consuming formula that could be traced back to the Abbott Laboratories plant in Sturgis, Michigan. Even though the Centers for Disease Control failed to connect the strains of bacteria found by the FDA in that facility with the strain that tragically killed two of the infants, the conditions at the plant were revealed to be less than satisfactory.

FDA Commissioner Robert Califf’s May 25 testimony before the House Committee on Energy and Commerce explains that the FDA found conditions at the Sturgis plant unfit for producing food for infants. Since Abbott accounts for 40% of sales in the U.S. baby formula market, Abbott’s agreement to shut down the plant resulted in a severe worsening of the ongoing formula shortage.

Here's the major question we are now concerned with: Why were we susceptible to such a supply shock when only one major plant in the country suspended operations?

It could be the result of reduced competition in the formula market. However, this lack of competition is plausibly the result of public policies rather than anticompetitive conduct by relevant private parties. Our antitrust laws were built to deal with harms to the process of market competition, but they have only applied to individuals and corporations. Government policy is generally exempt from antitrust scrutiny, even if it has negative consequences for competition and consumer welfare.

In National Society of Professional Engineers v. United States (1978), the Supreme Court succinctly described a core tenet of antitrust jurisprudence. That is, the chief reason that competition is desirable and worth protecting is that it tends to raise quality, lower prices, and improve choices for consumers over time. In the majority opinion for that case, Justice John Paul Stevens averred:

”The Sherman Act reflects a legislative judgment that ultimately competition will produce not only lower prices, but also better goods and services … The assumption that competition is the best method of allocating resources in a free market recognizes that all elements of a bargain — quality, service, safety, and durability — and not just the immediate cost, are favorably affected by the free opportunity to select among alternative offers.”

However, consumers often fail to reap the full potential benefits of competition because of government policies that restrict output and keep prices higher. For example, the market for infant formula has remained concentrated for decades. Even though economists working at the FDA have inquired into this issue, it may be that the FDA prefers a more concentrated market because it equates to less firms to supervise. Other firms have applied to enter the baby formula market through the FDA over the years, apparently to no avail.

As mentioned in our previous article, other regulations further restrict competition. The USDA’s Special Supplemental Nutrition Program for Women, Infants and Children (WIC) program, for instance, doesn’t allow recipients to enjoy the “free opportunity to select among alternative offers” because it restricts all recipients in a state’s WIC program to just one product of baby formula. Protectionist policies like high tariff rates keep foreign product from coming to market to compete with domestic producers.

One may argue that we need these regulations for various purposes like national security or providing a safety net — and that’s fine — but we must acknowledge these restrictions’ potential to reduce competition and consider whether their costs may outweigh their benefits.

Companies like Abbott Laboratories have a heightened incentive right now to step up safety and hygienic measures at their manufacturing plants now that scrutiny from the public, the FDA, and Congress is focused on them like a laser — but what’s to keep that from devolving a few years down the line? Competition is what we rely on to keep markets honest, but government interventions can keep it from working.

To their credit, the Biden administration and the FDA have taken some measures to get families the formula they need in these tough times, but these are temporary measures that will play well during election season. Once this all blows over, the formula companies know that they will get back to normal and retain their pre-shortage market shares. If we really want to make them sweat, we should reduce tariffs and trade restrictions on foreign imports of baby formula and trust parents to make the right decisions for their own children.

Taking seriously the effects of government restrictions on competition would help release competitive forces to the benefit of all consumers.

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