Document Type

Thesis - Open Access

Award Date

2024

Degree Name

Master of Science (MS)

Department / School

Economics

First Advisor

David Davis

Abstract

This research investigated the competitive bidding dynamics for infant formula rebate contracts within the Special Supplemental Nutrition Assistance Program for Women, Infants, and Children (WIC). I begin by focusing on the differences between winning and losing bids. The study employs multiple regression to predict rebate bids submitted by major manufacturers when they win a contract. I next conduct a paired t-test for each manufacturer – revealing statistically significant differences between predicted bids (based on the parameters from the winning model) and actual bids when a manufacturer did not win. This suggests that each manufacturer bids significantly lower rebates (higher net prices, wholesale price – rebate) from their expected bids based on the winning bid functions when they lose a contract auction. I next engage is a number of tests meant to detect evidence of tacit collusion as suggested by game theoretic models. Specifically, I test for evidence that manufacturers engage in tit-for-tat punishment strategies meant to dampen competition for contracts. For example, I examined the distributions of differences between actual bids and predicted bids and found they are skewed negative for rebates and positive for net prices. I defined “fake bid” as a bid lower than one standard deviation and two standard deviations below the mean predicted bid (above the mean for net prices) and found that manufacturers are less likely to submit fake bids on contracts they previously controlled. This suggests a strategic bidding approach, potentially indicating tacit collusion, where competitors are more likely to engage in non-serious bidding when attempting to win contracts from each other. Moreover, I conduct Granger causality tests to assess the strategic interactions, particularly looking for evidence of a tit-for-tat strategy where manufacturers react to each other’s market share changes. The results showed significant interdependencies, confirming that changes in one manufacturer’s market share could predict changes in another’s. The insights gained from this research contribute to a deeper understanding of the dynamics surrounding infant formula contract bidding in the WIC program, offering potential avenues for enhancing its efficiency and fairness.

Publisher

South Dakota State University

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Rights Statement

In Copyright