The Strategic Role of Disruption Information Sharing on the Supply of Sterile Injectable Drugs
45 Pages Posted: 18 Mar 2021
Date Written: March 11, 2021
The supply of injectable drugs is subject to frequent disruptions. Injectables comprise nearly 80% of all medicines that have experienced shortages during consecutive years. Inadequate capacity resulting from manufacturing quality glitches is a common reason for such shortages. Still, the capacity decisions of competing suppliers, and their impact on the drug supply remains mostly unexplored. To address this issue, we consider two firms selling partially substitutable drugs to a common market. The firms may invest in a combination of reliable and unreliable capacity, where the latter is cheaper but prone to disruption. Each firm's disruption is private information and firms make early and late production decisions that occur before and after learning about the rival's disruptions respectively. We investigate the impact of sharing disruption information on the equilibrium choice of capacities. As expected, the firms benefit from information sharing because it allows them to utilize their excess capacity more efficiently. However, somewhat surprisingly, such information sharing leads to reduced investment in the reliable capacity, which in turn results in lower supply when both firms are disrupted. We propose investment tax credits on capacity additions as a potential mitigation strategy. We find that offering tax credits can not only mitigate the detrimental effect of information sharing but also boost up overall supply. Finally, motivated by the emergence of COVID-19, we investigate the supply chain's resiliency against unforeseen demand surges.
Keywords: Drug Supply Chain, Shortages, Information Sharing, Tax Credits, Supply Disruptions
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