A Two-Sided Budget-Neutral Incentive Program for Coordinating an Influenza Vaccine Supply Chain With Endogenous Supply and Demand Under Uncertainty

Abstract

Problem definition: The US influenza (flu) vaccine supply chain is decentralized and experiences frequent supply and demand mismatches caused by two key factors: (1) the vaccine production process (yield) is highly uncertain; and (2) individuals are self-interested and do not completely take into account positive and negative externalities that they impose on others. To improve matching of supply and demand, we counteract these factors by developing an ex-ante budget-neutral incentive program. Methodology: We model the flu vaccine supply chain as a decentralized system consisting of self-interested individuals on the demand side, and a profit-maximizing manufacturer with uncertain yield on the supply side. We use backward induction to characterize the subgame-perfect equilibrium of the sequential game that models the interactions between individuals and the manufacturer. Results: We develop a two-sided incentive program that proposes ‘vaccination incentives’ to be given to individuals on the demand side, and ‘a menu of transfer payments’ between the social planner and manufacturer on the supply side. When the realized vaccine supply is high (or low), our incentive program provides positive (negative) vaccination incentives for individuals to stimulate (or curb) the demand and eliminate positive (or negative) externalities by making vaccination more affordable (or costly). When social benefits from vaccination are significantly high, our incentive program uses a menu of transfer payments to penalize (or subsidize) the manufacturer for low (or high) yield realizations so that it produces the socially-optimal quantity. We show that our incentive program can attain the social optimum, maintain an ex-ante balanced budget (i.e., budget-neutral in expectation), and distribute the maximum social welfare between individuals and the manufacturer arbitrarily. Academic/practical relevance: We establish the sources of inefficiency in the flu vaccine supply chain. To eliminate the inefficiency, we develop a two-sided incentive program that policymakers can implement to finance vaccines under an ex-ante balanced budget. Managerial implications: Vaccination incentives to individuals can ensure their access to the vaccine, but they are not enough to entice the manufacturer to ensure vaccine availability. A menu of contracts contingent on realized yield provides necessary incentives to the manufacturer and assures the availability.