Working Paper: NBER ID: w9833
Authors: Michael Kremer; Christopher M. Snyder
Abstract: In a simple representative consumer model, vaccines and drug treatments yield the same revenue for a pharmaceutical manufacturer, implying that the firm would have the same incentive to develop either ceteris paribus. We provide more realistic models in which the revenue equivalence breaks down for two reasons. First, drug treatments are sold after the firm has learned who has contracted the disease; in the case of heterogeneous consumers who vary with respect to the probability of contracting the disease, there is less asymmetric information to prevent the firm from extracting consumer surplus with drug treatments than with vaccines. We prove that, due to this aspect of pharmaceutical pricing, the ratio of drug-treatment to vaccine revenue can be arbitrarily high; we calculate that the ratio is about two to one for empirical distributions of HIV risk. The second reason for the breakdown of revenue equivalence is that vaccines are more likely to interfere with the spread of the disease than are drug treatments, thus reducing demand for the product. By embedding an economic model within a standard dynamic epidemiological model, we show that the steady-state flow of revenue is greater for drug treatments than for vaccines.
Keywords: pharmaceutical economics; vaccine profitability; drug treatments; consumer behavior
JEL Codes: O31; L11; I18; D42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Drug treatments (C22) | Higher expected revenue (H27) |
| Timing of sales (C41) | Better revenue extraction (H29) |
| Better revenue extraction (H29) | Higher expected revenue (H27) |
| Vaccines reduce disease transmission (I14) | Lower revenues for vaccine developers (O39) |
| Drug treatments (C22) | Steady-state revenue flow exceeds vaccines (H87) |
| Consumer heterogeneity (D11) | Drug treatments yield more revenue than vaccines (H27) |
| Monopolist selling treatments (D42) | Revenues of 1,900,000 (H27) |
| Vaccines (I19) | Revenues of 1,000,000 (H27) |
| Revenue ratio of drug treatments to vaccines (H51) | Approximately 2:1 (Y10) |