Real World Economics Applied – Crying Over Spilt Milk? Reining in US$55bn Formula Milk Industry

An excellent article from the Straits Times recently:

How the $73.5 billion infant formula industry milks new parents’ anxieties, and what S’pore is doing about it

Some facts gleaned from the article:

1. World Health Organisation (WHO) recently renewed calls for countries to do more to rein in formula milk advertising.
2. In 2017, The Straits Times reported that prices had jumped 120 per cent over a decade, as milk powder manufacturers tweaked formulas and introduced “premium” ingredients to justify higher prices.
3. Bold claims, such as being able to boost intelligence and eyesight, were touted.
4. Investigation by Competition and Consumer Commission of Singapore (CCS) found that aggressive marketing was among the factors that had pushed formula mik prices in Singapore to among the highest in the world.
5. A report by The Lancet medical journal described how typical infant behaviours such as crying and fussiness are portrayed by the industry as reasons to introduce formula, when in fact they are developmentally appropriate.
6. A separate study led by Imperial College London honorary senior lecturer Daniel Munblit debunked the health claims made for 608 products on the websites of infant formula companies in 15 countries. Of these, three quarters did not cite scientific evidence to support their claims, and nearly 90 per cent of the clinical trials referred to had authors who received funding from or had ties to the formula industry, said the study, which called the marketing tactics “predatory”.
7. A 2022 WHO/Unicef report found that more than half of parents and pregnant women surveyed across the world have been targeted with misleading marketing messages.

In Economics, we learn about non-price competition. 

There are two key ways:

Through Product Innovation (typically via R&D) as well as through Marketing.  

Clearly, the formula milk industry is focused on these.

While R&D is typically considered a good thing,  we can see, from this example (point 6 above), how it can also be exploited. Science may not be scientific after all.

In economics, we also learn of the dangers of persuasive advertising – to convince consumers of how one’s products are superior. Brought to the extreme, it results in misinformation, which is linked to the concept of imperfect information or consumer ignorance under the topic of market failure. 

Thus, the firms’ actions can lead to over consumption of formula milk which is an over-allocation of scarce resources to formula milk.

This example also shows that aggressive advertising can lead to higher prices. There are 2 ways:

Firstly, it increases demand by altering consumers’ taste and preferences towards formula milk, which tends to increase the market price. Secondly, the producers may increase price so as to recover hefty advertising cost –  this is not difficult to do when most of the other firms in the industry are doing likewise and should the demand for formula products be priced inelastic. 

In fact, the advertising can also cause demand to be price-inelastic as it causes consumers to perceive the particular formula milk product to be far better than others (perceiving that others are not comparable, including breast milk and hence reducing the availability of close substitutes) and causes consumers to feel like they need to buy it (increasing the degree of necessity).

(See the need to know your determinants of Price Elasticity of Demand so well?)

Why do we care?  

1. Firstly, as already above-mentioned, there is misallocation of scarce resources (allocative inefficiency), hence societal welfare is being reduced.  

2. Secondly, consumers are being exploited as consumers are manipulated to buy more and at higher prices, greatly reducing consumer surplus and hence consumer welfare.

3. Thirdly, there is the issue of equity or perceived inequity. As the prices of formula milk increase and consumers thinking that they need to get their hands on it,  the lower income households will struggle and feel that the odds are stacked against them – being unable to afford the “best” nutrition for their babies.

Good thing the Singapore government implemented various regulations since 2017. 

For example:

1. Advertising: Formula milk manufacturers are not allowed to advertise their products in a way that could undermine breastfeeding. This includes any statements that suggest formula milk is superior to breast milk.
2. Marketing: The promotion of formula milk products in hospitals and other healthcare facilities is not allowed. Healthcare professionals are also not allowed to accept gifts or other incentives from formula milk manufacturers.
3. Labelling: Formula milk must be labeled in accordance with the regulations set by the AVA. This includes information on the ingredients, nutrient content, and instructions for use. The labels must also include a warning that breastfeeding is the best form of nutrition for infants.
4. Education: The Health Promotion Board embarked on a multi-year campaign with the message that breast milk is best for babies, especially in the first year of life.

(Students should immediately identify the Policies: Legislation as well as Education campaigns.)

From the Straits Times article:

Exactly what the students of Economics also learn regarding informative advertising versus persuasive advertising!

Informative advertising is useful because without it we may also have a problem of imperfect information.

Thus, regulations have to strike a balance – such that persuasive advertising is curbed, while still allowing useful information to be conveyed.

Moreover, the formula milk industry may also claim that “plain packaging” will not be good for intelligence and eyesight! LOL

Students, can you draw the diagrams showing misallocation of resources? Can you also illustrate how the various policies can correct the market failure? To be sure, join our JC & IB Economics Tuition today!