Innovation Policy and the Market for Vaccines

Abstract

Vaccines play a crucial role in improving global public health, with the ability to stem the spread of infectious diseases and the potential to eradicate them completely. Compared with pharmaceuticals that treat disease, however, preventative vaccines for infectious diseases have received far less attention from both biomedical researchers and innovation scholars. This neglect has substantial human and financial costs, as vividly illustrated by the COVID-19 pandemic.

In this article, we argue that the large number of “missing” vaccines is likely due to more than lack of scientific opportunities. Two key aspects of vaccines help account for their anemic development pipeline: (1) they are preventatives rather than treatments; and (2) they are generally durable goods with long-term effects rather than products purchased repeatedly. Both aspects make vaccines less profitable than repeat-purchase treatments, even given comparable IP protection. One set of problems arises from irrational preferences by purchasers, including both patients and healthcare payers. For example, patients generally underestimate their likelihood of getting sick, and they underestimate costs that are in the future or divided into separate purchases, causing them to pay more overall for repeat-purchase drugs than for vaccines. But even for rational, risk-neutral purchasers, we explain how—counterintuitively—both key aspects of vaccines still prevent monopolists from extracting the same profits as they can for repeat-purchase therapeutics.

The preventative and durable aspects of vaccines generate substantial social benefits, but policymakers should recognize that these features also reduce incentives to develop vaccines in the first place—particularly when these benefits lead to political pressure for low vaccine prices. We conclude by arguing that innovation policy should address these market distortions by experimenting with larger government-set rewards for vaccine production and use. Most modestly, policymakers should increase direct funding—including on grants and public–private partnerships—and insurance-based market subsidies for vaccine development. We also make the case for a large cash prize for any new vaccine made available at low or zero cost.

Note: The authors have no funding information or conflicts of interest to declare.

Keywords: vaccines, preventatives, pharmaceuticals, innovation, intellectual property, behavioral economics, durable goods

JEL Classification: H41, H51, I18, K20, K39, L65, O31, O34, O38