In many cases, only a handful of suppliers produce vaccines for a given disease. In fact, for several vaccine types the U.S. has fewer suppliers than countries with a smaller market and a higher level of government purchase.
One reason for this finding could be strict government regulation. All vaccines must be approved by the FDA. Further, the CDC provides guidelines to physicians regarding who should get which vaccines. The CDC also is a large purchaser of vaccines. Thus, at first glance, it seems that government regulation may be causing industry consolidation in the vaccine market.
A paper by Danzon and Pereira, however, finds this not to be the case. They find that the likelihood a supplier exits from a particular vaccine market is not effected by whether the CDC is a purchaser of the vaccine, the amount of vaccine the CDC purchases, or the CDC price at the time the firm exits.
The authors propose that the large economies of scale in vaccine production are the cause of the lack of competition in the vaccine market.
“The vaccine industry is characterized by large fixed costs of initial vaccine development as well as substantial ‘semifixed’ costs of producing an individual batch (a process that may take 6 to 18 months) but low marginal costs of producing an additional dose, up to the batch limit, and low storability. If there are multiple competing suppliers with large sunk costs and low marginal costs, competition may drive the price low enough that it is relatively unattractive for multiple firms to remain in the market and for new firms to enter.”
Further, the demand for vaccines is price sensitive. Insurers (public and private) typically pay physicians and hospitals a fixed payment per vaccine administered. Increases in vaccine costs come directly from the provider’s bottom line.
Some observers may point to the 2004-2005 influenza vaccine shortage and claim that government regulation had to cause this shortage. The authors note that although several suppliers did exit the market before the shortage years, “…this cannot be blamed on government purchase and price controls, as less than 20 percent of the flu vaccine is publicly purchased.”
- Source: Patricia Danzon and Nuno Pereira, “Vaccine Supply: Effects Of Regulation And Competition.” NBER Working Paper 17205, July 2011.