Price transparency could improve the effectiveness of the vaccination campaign

In mid-December, shortly before the start of the Covid-19 vaccination campaign in Europe, Eva De Bleeker, Belgian Secretary of State for the Budget, caused a stir by publishing a tweet (since withdrawn) detailing the price of doses sold by 6 laboratories to Belgium: prices ranging from 1.78 euros each for AstraZeneca to 14.68 euros for Moderna.

Philippe Mahenc, University of Montpellier and Alexandre Volle, University of Paris Dauphine - PSL

This publication embarrassed the European Commission, which was in the middle of negotiations for a massive purchase. A spokesperson quoted by Le Monde recalled that "everything concerning information such as vaccine prices is covered by confidentiality", underlining "a very important obligation and contractual requirement".

This confidentiality clause on vaccine prices is part of a commercial strategy that neglects the interests of the public, whether or not they use vaccines, since, through the social security system, the public will ultimately pay the vaccine prices negotiated by the State.

By concealing prices, the state and laboratories deprive buyers of the opportunity to acquire information on vaccine efficacy, as our research shows. This secrecy increases the risk that certain laboratories will adopt opportunistic behavior by setting prices that do not reflect the real efficacy of vaccines.

The importance of independent control

By observing these prices, the end consumer could analyze the signals they transmit, possibly obtain additional information on the efficacy of the various vaccines and, ultimately, learn whether or not he or she is the victim of opportunistic strategies on the part of pharmaceutical laboratories.

This confidentiality may also suggest that it conceals other information about the degree of independence of certifiers or quality controllers. In a recent working paper, we analyze the strategic interaction between the price signal transmitted by an industry on the quality of its products (in the USA, in the case of Covid-19 vaccination) and quality control by an independent third party.

We show that, in certain cases, this control (even if imperfect) remains essential to guarantee the credibility of the price signal, and thus eliminate opportunistic behavior. Control independence is crucial in this respect. Precise control reduces the cost of the price signal for the industry. In other words, we show that the presence of this control encourages the industry to improve product quality by preventing opportunistic behavior. However, if the certifier and the industry have interests that are too close, then the price signal is not credible, and buyers cannot learn the exact quality of the product.

For the market price signal to be credible, the certifier must place greater importance on social well-being than on industry profit. In other words, there must not be too much collusion between the certifier and the industry to prevent market prices from blurring information on product quality.

A public good

Precisely, the treatment of the Covid-19 pandemic is a public good in the economic sense of the term: protecting an individual against the virus is a benefit that is not exclusive to that person, insofar as the repercussions are beneficial for the rest of the community. The effectiveness of a vaccine is also a public good on a planetary scale: by increasing the chances of protecting an individual, we reduce the risks of contaminating the rest of the international community.

Rather than thinking in this way, governments are treating the pandemic as a private commodity. They buy vaccines from pharmaceutical companies that have the power to set both the price and quality of their goods. The six laboratories AstraZeneca, Johnson & Johnson, Sanofi/GSK, Curevac, Pfizer-BioNTech and Moderna have already sold their anti-Covid variants of the vaccine to the European states, even before they know the actual quality of each variant.

Laboratories remain profit-driven companies, segmenting the market between different variants of the same product, and setting their own prices. By advertising the efficacy of its vaccine, a laboratory targets a specific clientele made up of one or more countries.

This clientele is more or less captive, depending on their wealth: the revenues that governments can collect from their citizens through social insurance schemes. Market segmentation enables laboratories to relax competitive pressure among themselves, thereby increasing their profit margins.

Even if buyers suffer as a result of the exchange, there's nothing illegal about resorting to such strategies, since companies don't need to explicitly agree among themselves to implement them. Economists refer to this competitive regime as "monopolistic" or "oligopolistic". They have long warned of the disadvantages that can be expected.

Market mechanisms are not enough

As an example, let's re-read a theoretical article published by Michael Spence, co-winner of the 2001 Nobel Prize in Economics for his work on markets with asymmetric information (with Joseph E. Stiglitz and George Akerlof). The American economist shows that a monopolistic market, in which companies have the power to set both the price and the quality of their product, does not allow market exchange to be organized efficiently.

The efficiency to which Spence refers is a criterion to which a fictitious "benevolent" institution is subjected, defending the general interest of economic agents, both consumers and entrepreneurs. The aim of this institution is to achieve the greatest possible social benefit. On the subject of protection against a pandemic, such an institution could be the World Health Organization, if it had the authority to regulate the production and distribution of vaccines worldwide.

By contrast, the logic of the corporation is to maximize profit by extracting as much money as possible from its customers. By comparing this logic to that of the benevolent institution, Spence establishes deviations that highlight the inefficiency of the company.

In short, we can't rely exclusively on the market mechanism to allocate vaccines efficiently between purchasing countries. They cannot rely on the illusory benevolence of the laboratories. Rather than treating protection against the virus as a commodity, they would do better to consider it for what it fundamentally is: a public good.

Philippe Mahenc, Professor of economics (environmental economics/industrial organization/agricultural economics), University of Montpellier and Alexandre Volle, Post-doctoral fellow at the Governance & Regulation Chair, Université Paris Dauphine - PSL

This article is republished from The Conversation under a Creative Commons license. Read theoriginal article.