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, Belgium’s Secretary of State for the Budget, sparked controversy by posting a tweet (since deleted) detailing the prices of doses sold to Belgium by six pharmaceutical companies: prices ranging from €1.78 per dose for AstraZeneca to €14.68 for Moderna.
Philippe Mahenc, University of Montpellier and Alexandre Volle, Paris Dauphine University – PSL
This report has put the European Commission in an awkward position, as it is currently negotiating a large-scale purchase. A spokesperson quoted by the newspaper Le Monde noted that “any information regarding matters such as vaccine prices is subject to confidentiality,” emphasizing that this is “a very important obligation and a contractual requirement.”
This confidentiality clause regarding vaccine prices is part of a commercial strategy that disregards the public interest, whether or not people actually receive the vaccines, since, through the social security system, the public will ultimately foot the bill for the vaccine prices negotiated by the government.
By keeping prices secret, the government and pharmaceutical companies deprive consumers of the opportunity to obtain information about the effectiveness of vaccines, as our research shows. This secrecy increases the risk that some pharmaceutical companies will engage in opportunistic behavior by setting prices that do not reflect the vaccines’ actual effectiveness.
The Importance of Independent Oversight
By looking at these prices, consumers could analyze the signals they send, potentially obtain additional information about the effectiveness of various vaccines, and ultimately determine whether or not they are falling victim to opportunistic strategies on the part of pharmaceutical companies.
This lack of transparency may also suggest that it conceals other information regarding the degree of independence of certifiers or quality controllers. In a recent working paper, we analyze the strategic interaction between the price signal sent by an industry regarding the quality of its products (to governments in the case of COVID-19 vaccination) and quality control by an independent third party.
We show that, in certain cases, this oversight (even if imperfect) remains essential to ensure the credibility of the price signal, thereby eliminating opportunistic behavior. The independence of the oversight is crucial in this regard. The accuracy of the oversight helps reduce 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 closely aligned, then the price signal is not credible and buyers cannot determine the exact quality of the product.
For the market price signal to be credible, the certifier must prioritize social welfare over industry profits. In other words, collusion between the certifier and the industry must not be too strong, so that market prices do not obscure information about product quality.
A public good
Indeed, the response to the COVID-19 pandemic is a public good in the economic sense of the term: protecting an individual from the virus is a benefit from which they do not derive exclusive benefit, as the effects are beneficial to the rest of the community. The effectiveness of a vaccine is also a global public good: by increasing the chances of protecting an individual, we reduce the risk of infecting the rest of the international community.
Rather than thinking this way, governments treat the response to the pandemic as a private commodity. They purchase vaccines from pharmaceutical companies that have the power to set both the price and the quality of their products. The six companies—AstraZeneca, Johnson & Johnson, Sanofi/GSK, CureVac, Pfizer-BioNTech, and Moderna—have already sold their COVID-19 vaccine variants to European countries even before those countries knew the actual quality of each variant.
Pharmaceutical companies remain profit-driven businesses that segment the market into different versions of the same product, for which they set the prices. By highlighting the effectiveness of its vaccine, a pharmaceutical company targets a specific clientele consisting of one or more countries.
This customer base is more or less captive depending on its wealth: it consists of the revenues that governments can collect from their citizens through a social insurance system. Market segmentation allows pharmaceutical companies to ease competitive pressure among themselves in order to increase their profit margins.
Even if buyers suffer as a result of this practice, there is nothing illegal about using such strategies, since companies do not need to explicitly collude with one another to implement them. Economists describe this competitive structure as “monopolistic” or “oligopolistic.” They have long warned of the negative consequences that can result from it.
Market mechanisms are not enough
Let us revisit, by way of example, a theoretical article published by Michael Spence, co-winner of the 2001 Nobel Prize in Economics for his work on markets with information asymmetry (along with Joseph E. Stiglitz and George Akerlof). The American economist demonstrates that a monopolistic market in which firms have the power to set both the price and the quality of their product does not allow for the efficient organization of market exchange.
Niccolò Caranti/Wikimedia, CC BY-SA
The efficiency to which Spence refers is a criterion to which a hypothetical “benevolent” institution—one that defends the common interest of economic agents, including both consumers and entrepreneurs—adheres. The goal of this institution is therefore to achieve the greatest possible social benefit. With regard to 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 a business is to maximize its profits by extracting as much money as possible from its customers. By comparing this logic to that of a benevolent institution, Spence identifies discrepancies that highlight the inefficiency of the business.
In short, we cannot rely solely on market mechanisms to allocate vaccines effectively among purchasing countries. These countries cannot count on the illusory goodwill of pharmaceutical companies. Rather than treating protection against the virus as a commodity, they would do better to view 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, Postdoctoral Fellow at the Governance & Regulation Chair, Paris Dauphine University – PSL
This article is republished from The Conversation under a Creative Commons license. Readthe original article.