NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Why Are Drugs More Profitable Than Vaccines?

Michael Kremer, Christopher M. Snyder

NBER Working Paper No. 9833
Issued in July 2003
NBER Program(s):   HC   IO

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.

download in pdf format
   (567 K)

email paper

The NBER Bulletin on Aging and Health provides summaries of publications like this.  You can sign up to receive the NBER Bulletin on Aging and Health by email.

This paper is available as PDF (567 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w9833

Users who downloaded this paper also downloaded these:
Kremer w7716 Creating Markets for New Vaccines Part I: Rationale
Finkelstein w9460 Health Policy and Technological Change: Evidence from the Vaccine Industry
Kremer w7717 Creating Markets for New Vaccines Part II: Design Issues
Berndt, Glennerster, Kremer, Lee, Levine, Weizsacker, and Williams w11288 Advanced Purchase Commitments for a Malaria Vaccine: Estimating Costs and Effectiveness
Danzon, Wang, and Wang w9874 The Impact of Price Regulation on the Launch Delay of New Drugs - Evidence from Twenty-Five Major Markets in the 1990s
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us