A Two-Sided Mechanism to Coordinate the Influenza Vaccine Supply Chain

Abstract

We model the influenza (flu) vaccine supply chain as a decentralized system consisting of a monopolist manufacturer with an uncertain production process and rational (self-interested) consumers. We develop a two-sided coordinating mechanism which counteracts two main sources of inefficiency in the flu vaccine supply chain, namely, the uncertain yield and rational consumer behavior. On the demand side, the two-sided mechanism proposes tax/subsidy payments between the social planner (e.g., government) and consumers which depend on the realized yield. In some cases, the two-sided mechanism reduces the demand by taxing vaccinated consumers and subsidizing unvaccinated consumers. On the supply side, the two-sided mechanism requires a transfer payment between the social planner and manufacturer which is also contingent on the realized yield. The transfer payment on the supply side is not independent from demand-side factors such as infection and vaccination costs. The two-sided mechanism requires the social planner to intervene but has a balanced budget, and also it can allocate the social welfare between consumers and the manufacturer arbitrarily. Using estimates from the literature, we conduct a numerical analysis and find that our two-sided mechanism reduces social costs up to 75%. We also find that mechanisms coordinating only one (demand or supply) side but failing to account for the inefficiency on the other side (the uncertain yield or rational consumer behavior) defeat their own purposes and increase social costs in some cases.