Strict rules on the advertising of baby formula are contributing to steep costs for parents in the UK, the competition watchdog has found, as it attempts to tackle “historically high” prices for the products.

Baby formula makers are restricted from promoting price reductions, which “has the effect of softening competition on price”, the Competition and Markets Authority (CMA) said on Friday, amid concerns parents are overpaying for the product.

The watchdog also said it was considering whether regulations around the labelling and marketing of infant formula are “being enforced effectively”. One of the main reasons for restricting advertising was the desire not to discourage breastfeeding.

The CMA launched a full-scale investigation into the “historically high” prices of baby formula earlier this year, with the average product rising by 25% over a two-year period.

On Friday, the CMA said that it would not deepen that investigation, instead opting to draw up recommendations for the government over regulatory reform as quickly as possible.

It said its findings had shown parents and carers were not being given the right information by suppliers to make well-informed purchasing decisions, and many were not switching from their first choice to cheaper options, even when prices rise.

The CMA also found that parents could save more than £500 over the first year of a baby’s life by switching to cheaper formulas.

An in-depth market investigation would require the CMA to pick a group of experts from its panel members to examine the issue, separate from the work already undertaken. This can sometimes take up to a year before provisional findings are made, and 18 months for a full report.

The UK formula market is dominated by Danone, which owns the Aptamil and Cow & Gate brands, and Nestlé, which makes SMA. Reckitt, a FTSE 100 consumer goods company that makes the Enfamil brand, is another player in the market.

The CMA said it had already identified significant concerns in the behaviour of manufacturers and current regulatory framework around baby formula, and these would be best addressed by progressing the market study and issuing recommendations rather than a more extensive investigation.

The need to address the situation has been pushed by leading doctors and nurses, including the Royal College of Midwives, who have warned that a failure to tackle the cost of soaring baby formula was creating a crisis of infant hunger and putting the health of babies from low-income families at risk.

Meanwhile, there have been reports of customers shoplifting food to feed their families as prices have soared during the cost of living crisis.

The CMA concluded that “price competition appears to be weak” and, despite regulations stating all formulas must meet similar compositional requirements, some manufacturers were able to better raise brand awareness and influence choices.

It said these were being amplified given the vulnerable circumstances; often for clinical reasons, choices on infant formula were first being made by parents.

It added: “As well as a lack of switching by existing customers, those who are choosing an infant formula brand for the first time are generally not choosing cheaper options as prices have risen.”

The watchdog found that many parents and carers were “naturally, not focused on comparing products and prices” shortly after a child is born, and the decision to formula feed is made in vulnerable circumstances. Once a baby is happy with the formula they have chosen, parents are then “reluctant” to switch, making it harder for smaller manufacturers to gain new customers in a market constrained by regulations.

The chair of Iceland, Richard Walker, has previously hit out at the “exploitation” of new parents and called for a price cap on baby formula.

The CMA is expected to publish an interim report in October.

A Danone UK spokesperson said: “Danone notes that the Competition and Markets Authority has decided not to make a market reference at this stage. We will continue our cooperation with the CMA regarding its market study and ensuring parents are supported as much as possible.

“We will also continue to work constructively on ways we can carry on delivering innovation and value to parents. In Danone’s experience, the UK formula milks market is competitive and dynamic.”

A Nestlé spokesperson said: “We will continue to work constructively with the CMA as they further explore market outcomes.”