Analysis of Chinese overseas infant milk powder purchasing

world-map-of-chinese-raids-to-seize-powdered-milk

It is not surprising if you are not allowed to buy more than 3 cans of infant formula milk powder in Rossman or DM recently no matter what the brand is. And maybe you already know this restriction is mostly due to the binge-buying of milk powder of Chinese People.

Why are Chinese so fanatical of overseas infant milk powder purchasing? Is there really shortage of milk powder in China? Actually the milk powder crisis should date back to 2008 when one Chinese company produced infant milk powder with excessive melamine which killed at least six infants and caused another 300,000 to fail ill.

After this scandal was disclosed, a serious of brands of milk powder was reported as with different degree of excessive melamine successively. The quality of milk powder for infant has been a big concern of not only the young parents but also the whole nation. Many Chinese no longer trust Chinese manufactured or even canned milk powder. The young parents have sought to buy safer foreign produced brands oversea. German, Dutch and Australian products are especially popular. Richer parents are willing to pay as much as three times the retail price for a can of baby formula!

Now 8 years has passed since the milk scandal, there should be some actions taken by the Chinese manufacturers, but why are the oversea milk powders still so popular? While partially thanks to the rapidly developed official1 and private2 E-business platform and modern logistic industry, more and more channels of oversea market are opened to Chinese customers recently. The price of purchasing mild powder abroad is now reduced at a more reasonable level. But for the theoretical reason behind it, let’s try to understand it based on game theory of incomplete Information.

Firstly, the demand for baby formula milk is rigid

There are 20 million babies born in China every year while the breastfeeding rate in China is only 28% in 2014 dropping from 67% in 1998 which is also 10% lower than the global average rate according to the report released by CBNData on 20 May.2016. Milk powder is vital to the health of the baby. The brand or classification of milk powder which the parents will choose for the babies has a strong impact on the milk powder market. If the domestic milk powder market cannot meet the customers’ need, more and more parents will look for the sources abroad.

Secondly, the consumers are still lack of confidence to the milk powder industry in China.

Set player 1 as the milk powder manufacturer and player 2 as the customer.

Player 1 has two choices. He can produce high quality milk powder and sell to the customer and also can choose to product low quality one and sell. The quality of milk powder is only known by the manufacturer. If the product is with high quality and is bought by player 2, player 1 can get normal profit. If the product is with low quality and is bought by player 2, player 1 can get excess profit. If the product is not sold out, player 1 will suffer from extra cost such as production cost or stock cost.

Player 2 also has two choices. She can choose to trust the manufacturer and buy the milk powder or distrust the manufacturer and doesn’t buy it. If the product is high quality and player 2 buy it, she will get better payoff and problem is solved. If she doesn’t buy it, she still needs to find other ways to solve this problem with extra searching cost. If the product is low quality and player 2 buy it, her baby will suffer from potential diseases which is a bigger cost to player 2.

The payoff of this game is as following:

Player 1
MH ML
Player 2 T (20,10) (-20,15)
D (-5,-10) (-5,-5)

 

MH: High quality milk

ML: Low quality milk

T: Trust

D: Distrust

For player 1, whether player trust or not, his best strategy is to produce low quality milk powder.

For player 2, if the product is with high quality, her best strategy is to trust player 1 and buy it. If the product is with low quality, her best strategy is to distrust player 1 as it suffers less loss. So she has no equilibrium strategy in this game.

As analyzed above, the demand of baby formula milk is rigid and the trust to China domestic milk manufacturers is low. Since only player 1 knows the real quality of the milk powder, player 2 will buy the product only when she has no choice.

The education condition and the income level may mainly influent the consumer’s choice. With higher education and income level, the consumers are more likely to buy milk powders overseas whether from online shopping platform or private procurement Service.

This is coincident with the survey that the main consumer group of China local brand of milk powder is from the third-tier cities and the main consumer group of foreign brand is from the first and second tier cites.

In the short term, the payoff of this game will not change too much as it is not easy to either reduce the demand of infant milk powder or improve the consumers’ trust to the local manufacturers. In the long term, both manufactures and consumers suffer from the game. The best strategy will be manufacturers produce high quality of milk powder and consumers buy them locally instead of purchasing oversea.

1: Official E-business platform is the platform provided by companies. For example: JD.COM

2: Private E-business platform is the platform provided by individuals via social network or personal contacts. For example: We-chat, Weibo.

References:

1,http://www.theepochtimes.com/n3/1889127-chinese-exchange-students-and-german-milk-powder-buy-in-bulk-resell-to-china/

2,http://www.chinadaily.com.cn/business/2014-05/30/content_17554498.htm

 

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