Negative network effects and public policy in vaccine markets

Abstract

This paper provides a thorough analysis of an oligopolistic market for a vaccine, characterized by negative (demand-side) network externalities, which stem from the free-riding behavior of individuals engaged in a vaccination game. We investigate industry viability in terms of a standard natural Cournot-type learning process for network industries and show that viability tends to favor monopoly or competition among few suppliers. We confirm that market performance is highly inefficient, due to the combination of three imperfections: market power, network effects and a health externality (i.e., contagion). We investigate the extent of these imperfections. Finally, we devise a two-part government subsidy scheme for producers and consumers that may restore social efficiency in such markets.