Patrick, let me explain the important parts of the paper to you.
Patrick
Okay, but can you explain it in simple terms?
Huang
Of course, I'll break it down for you. This paper is about how government procurement in welfare programs affects consumers, manufacturers, and the government.
Patrick
What's government procurement?
Huang
Government procurement is when the government buys products or services from private sectors for welfare programs.
Patrick
I see. So how does it affect consumers, manufacturers, and the government?
Huang
Well, let's focus on the example in the paper. They analyze the U.S. infant formula market and the WIC program.
Patrick
What's the WIC program?
Huang
The WIC program is a social welfare program that provides infant formula to low-income families. In the program, the government uses first-price auctions to get rebates from formula manufacturers. The winner of the auction exclusively serves all WIC consumers in the winning state.
Patrick
So the manufacturers compete to offer the highest rebates?
Huang
Exactly. The rebates account for around 85% of the wholesale price. And the manufacturers try to win the auction because it has three benefits: a spill-over effect on non-WIC demand, inelasticity of WIC consumers, and a positive impact on market competition.
Patrick
What does spill-over effect mean?
Huang
It means that winning the auction not only benefits WIC consumers but also attracts non-WIC consumers to buy the brand. So it increases overall demand for the brand.
Patrick
I get it. But what's inelasticity?
Huang
Inelasticity means that WIC consumers are less sensitive to price changes. They will still buy the formula even if the price goes up.
Patrick
Gotcha. So how do the auctions affect the manufacturers?
Huang
The auctions affect manufacturers differently. The smaller manufacturer is harmed the most because they have less bargaining power. And the paper suggests that instead of using auctions, the government could switch to a predetermined rebate procurement to benefit both consumers and manufacturers.
Patrick
That sounds like a good solution.
Putri
Guys, I have an idea to make money! We can use this auction system to our advantage.
Huang
Putri, be careful. Misusing the system for personal gain can have serious consequences.
Putri
Don't worry, I've got it all figured out. I've received a large investment from a gangster organization to start my own infant formula business. I'll win the auction and make a fortune.
Huang
Putri, this is dangerous. Gangsters can cause you a lot of trouble.
Patrick
Putri, listen to Huang. He knows what he's talking about.
Weeks pass and the scene changes.
Putri
Huang, I'm in crisis. My business is facing lawsuits, accidents, and contract suspensions. Everything's falling apart.
Huang
I warned you, Putri. You ignored the risks.
Patrick
Huang, what are you going to do?
Huang
I'll do my best to resolve the crisis, but I can't make any promises.
Patrick
Putri, you should've listened to Huang.
Huang
This is why it's important to understand the true meaning and implications of the article. It's not just about making money; it's about the consequences and the impact on society.
The conversation ends.
Title: Procurement in welfare programs: Evidence and implications from WIC infant formula contracts Authors: Yonghong An, David Davis, Yizao Liu, Ruli Xiao View this paper on arXiv
