Consumption Externality and Yield Uncertainty in the Influenza Vaccine Supply Chain: Interventions in Demand and Supply Sides

We study the impact of yield uncertainty (supply side) and self-interested consumers (demand side) on the inefficiency in the influenza vaccine supply chain. Previous economic studies, focusing on demand side, find that the equilibrium demand is always less than the socially optimal demand since self-interested individuals do not internalize the social benefit of protecting others via reduced infectiousness (positive externality). In contrast, we show that the equilibrium demand can be greater than the socially optimal demand after accounting for the limited supply due to yield uncertainty and manufacturer’s incentives. The main driver for this result is a second (negative) externality: self-interested individuals ignore that vaccinating people with high infection costs is more beneficial for the society when supply is limited. We show that the extent of the negative externality can be reduced through more efficient and less uncertain allocation mechanisms. In order to investigate the relative effectiveness of government interventions on supply and demand sides under various demand and supply characteristics, we construct two partially centralized scenarios, where the social planner (government) intervenes either on the demand side or the supply side but not both, and conduct an extensive numerical analysis.