Hospital Infant Formula Discharge Packages: A Blessing Or A Curse?

Guo, Fang, Economics - Graduate School of Arts and Sciences, University of Virginia
Anderson, Simon, Department of Economics, University of Virginia
Ciliberto, Federico, Department of Economics, University of Virginia
Chalak, Karim, Department of Economics, University of Virginia

This project focuses on the marketing strategy and pricing policy of infant formula manufacturers, consumer response to product lock-ins, and market with high switching costs. Formula companies employ a classic “bargain-then-rip-off” strategy to reel in customers then exploit them. Free gifts in hospital discharge packages are used to tempt mothers who could breastfeed, followed by oppressive price once customers are locked in. I develop a dynamic structural model to characterize the use of marketing and pricing strategies and consumer demand. A finite-horizon hyperbolic discounting model is utilized to account for possible time inconsistency in consumer preferences. For the particular population of US mothers in their first postpartum year, the present bias and the standard discount factors are estimated to be 0.20 and 0.93 respectively – consumers anticipate but underestimate the lock-in effect, reinforcing the “bargain-then-rip-off” strategy.

Formula companies’ “bargain-then-rip-off” strategy proves to be a winning one. I find that formula price is 3.6% higher than the price that a monopolist would charge in a counterfactual world where all hospitals ban infant formula free samples in discharge bags. I also find that if all hospitals go bag free, breastfeeding ratio will increase by approximately 2.0% each month, each mother will save on average ten dollars from the decrease in infant formula consumption, fifteen dollars from the decrease in infant formula price, and receive higher payoff from child health improvement due to longer breastfeeding duration through the first postpartum year. As a result, consumer welfare will increase by 38.9% and the formula firm’s profit will decrease by 3.2%.

PHD (Doctor of Philosophy)
state dependence, time-inconsistent preferences, free samples
All rights reserved (no additional license for public reuse)
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