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INFANT FORMULA INDUSTRY SUBJECT OF FTC "INQUIRY"

Executive Summary

INFANT FORMULA INDUSTRY SUBJECT OF FTC "INQUIRY," the Federal Trade Commission's Bureau of Competition Director Kevin Arquit testified at a May 29 hearing on infant formula pricing before the Senate Judiciary/Antitrust Subcommittee. "The facts before us, relating to the infant formula industry, while limited, raise sufficient competitive questions that I have directed my staff to conduct an inquiry," Arquit declared. "The Bureau of Competition is committed to assessing alleged anticompetitive conduct by firms in oligopolistic industries, whether it be through collusion or facilitating practices," Arquit continued. "The infant formula industry may have some characteristics that make it conducive for collusive or oligopolistic firm behavior," he explained. There are only three major players -- Enfamil-manufacturer Mead Johnson, Similac-manufacturer Ross Laboratories and SMA-manufacturer Wyeth -- and the products "appear to be relatively homogeneous" due to federal standards for product content and quality. The pricing issues addressed with regard to the infant formula industry in many respects parallel those in the pharmaceutical industry. Subcommittee Chairman Metzenbaum (D-Ohio) maintained that infant formula prices increased by "more than 150% during the 1980s, far outstripping inflation and the Consumer Price Index for food." Metzenbaum noted that milk prices rose by only 36% over the same period. The Ohio Democrat further noted that price increases by the three manufacturers from November 1981 to May 1990 have been close not only in amount but also in timing. Metzenbaum described what he called "an alarming pattern of lockstep pricing": the first company "raises its formula price, and competitors are quick to follow, often within a week and often within a few cents of the price leader." Metzenbaum contended that such "openly" mimetic pricing should be considered violative of antitrust law. "The antitrust laws clearly prohibit competitors from agreeing on prices," he said. "I believe that the same prohibition should apply when competitors openly follow price increases time after time." The hearing further echoed pharmaceutical industry issues in that the senator objected to the industry's behavior in offering price rebates to a government program for the poor -- in this case the Women Infants and Children (WIC) program. Metzenbaum noted that several states in 1987 began soliciting rebate bids as a way to contain infant formula expenditures under their WIC programs. The rebates proposed by the companies were allegedly similar. Rebates offered the first few states were in the range of 40-60" per can sold to WIC beneficiaries. The rebate offers then jumped to 90" and peaked last October in Michigan at $1.51 per can. The General Accounting Office estimated that the savings generated by a rebate of 30" per can nationwide would be sufficient to fund an addition of 177,100 beneficiaries to WIC programs. However, rebates have recently fallen to 75" per can. Metzenbaum traced the drop in rebate offers to a March 6 letter from Mead Johnson to four states. The letter, made public by the Agriculture Department and several state WIC programs, announces that Mead Johnson would offer 75" rebates and would agree only to one-year bid contracts. Stefan Harvey, Supplemental Food Program Project Director for the Center on Budget and Policy Priorities, testified that since Mead Johnson's public announcement, Ross and Wyeth also have offered 75" rebates, and "two or more companies have submitted bids within three cents of each other more than half the time." The center is a nonprofit research organization that focuses on policy issues affecting the poor. Abbott subsidiary Ross, based in Columbus, Ohio, which is Metzenbaum's home state, was the only infant formula manufacturer to accept an invitation to testify at the hearing. Ross President John Kane contended that WIC should develop "a number of administrative controls to help ensure the effectiveness of this program." WIC "has experienced explosive growth recently, serving 1.4 mil. infants today," Kane said. "The program would benefit from controls that, in particular, would assure that WIC rebate funds are used efficiently." Kane explained that Ross submitted a lowered 75" bid in Connecticut to protect against unnecessary losses anticipated there. The state's program provided that the winning bidder would supply the rebate even if another brand was sold to a WIC beneficiary by a retailer that happened to be out of the bid-winner's brand.

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