First‐best health policy in vaccine markets with health and network externalities

Abstract

AbstractThis paper considers an oligopolistic market for a vaccine, characterized by negative network effects, which stem from the free‐riding behavior of individuals engaged in a vaccination game. Vaccine markets often suffer from three imperfections: high concentration, network effects, and a health externality (contagion). The first conclusion of the paper is that the negative network externality is important as a market distortion, as it may lead to significant welfare losses. The second and main part of the paper develops a two‐part per‐unit subsidy scheme that a social planner could use to target both consumers and producers of vaccines. The scope of such a subsidy scheme to induce the firms to produce the first‐best output without network effects (which is the most ambitious first‐best target) is investigated. In many cases, while the first‐best is attainable, it requires negative prices for vaccines, which amounts to rewarding consumers to induce them to vaccinate.