Vaccine market coordination using subsidy

Abstract

Prevention of infectious diseases is an important concern for managing public health. Although vaccines are the most effective means for preventing infectious diseases, the existence of a negative network externality often makes it difficult for vaccine coverage to reach a level that is socially optimal. In this research, we consider how a subsidy program can induce a socially optimal vaccine coverage. We consider an oligopoly market with identical vaccine producers and derive a subsidy that leads to a socially efficient level of coverage. We also derive a tax-subsidy combination that is revenue neutral, but achieves the same effect. Overall, our results provide useful insights for governments and policy makers with respect to an important issue related to public health.

Keywords:

• Vaccine coverage
• network externality
• negative network effect
• vaccine effectiveness
• vaccine pricing
• vaccine subsidy

Acknowledgments

We would like to thank the department editor (Pinar Keskinocak), the associate editor, and the three reviewers for their constructive comments on earlier versions of this paper. This paper has greatly benefited from their efforts.

Notes

¹We use the term “socially optimal level” to mean a level of coverage that achieves the maximum total social welfare.

²If a disease is more infectious, the probability of infection is higher and does not go down quickly enough with higher vaccine coverage. In other words, in this situation, a consumer needs the vaccine more to avoid infection and is willing to pay a higher price.

³As mentioned earlier, for this as well as all the other plots in the paper, we make use of the approximation: p(f)=η(1−φ)r(f), for φ<1.

⁴The vaccine market is a perfect real-world setting to apply Cournot competition. In this market, the production decisions are made long before the actual production starts and the vaccine becomes available to the consumer. As a result, the manufacturer cannot react to a change in demand quickly, as is evident from common stories about vaccine shortages and huge back orders (Chick et al. 2008, Deo and Corbett 2009). Therefore, a Cournot-like quantity competition is more suitable for this market than a Bertrand-like price competition. Furthermore, as shown by Kreps and Scheinkman (1983), when manufacturers plan for a certain quantity and capacity in the first stage, a Bertrand-like price competition would still lead to a Cournot equilibrium.