The Revenue Consequences of Vaccines Versus Drug Treatments

In a simple representative consumer model, vaccines and drug treatments yield the same revenue for a pharmaceutical manufacturer, implying that the firm would have the same incentive to develop either ceteris paribus. In a more realistic model with heterogeneous consumers who vary with respect to the probability of contracting the disease, the revenue equivalence between vaccines and treatments breaks down. Treatments are sold after the firm has learned who has contracted the disease; there is less asymmetric information to prevent the firm from extracting consumer surplus than with vaccines. We show there exist distributions of consumer types such that the firm earns arbitrarily more revenue with a treatment than a vaccine. Empirical distributions of AIDS risk exhibit characteristics of such distributions. We identify further advantages of drug treatments over vaccines in terms of surplus extraction that arise in a dynamic extension of the model. JEL codes: O31, L11, I18, D42 Kremer: Department of Economics, Harvard University, Littauer Center 207, Cambridge MA 02138; email: [email protected]. Snyder: Department of Economics, George Washington University, 2201 G Street N.W., Washington DC 20052; email: [email protected]. This paper was prepared for the 2002 IAEN Symposium on the Economics of AIDS/HIV in Developing Countries held in Barcelona. The authors would like to thank Bryan Boulier for helpful comments.