Introduction

In the next decade, U.S. and world demand for vaccines is expected to increase sharply, in part because of bioterrorism threats. But the vaccine industrial base has been declining for decades. Between 1966 and 1977, half of all commercial vaccine manufacturers stopped producing vaccines, and the exodus continued in the 1980s and 1990s. More than 25 companies produced vaccines for the U.S. market 30 years ago; today there are only 5 (Institute of Medicine 2004). Five of the current recommended vaccines have only one producer, and the others have either two or three (Institute of Medicine, p. 5).

Private companies find vaccines less financially rewarding than drugs. In 2001 the global marketplace for therapeutic drugs exceeded $300 billion, whereas worldwide vaccine sales were only about $5 billion. There are several reasons for this differential. Thomas (2002) offers one: patients must take some drugs every day, whereas vaccines are given only occasionally.

Kremer and Snyder (2003) offer a second explanation. 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, other factors being the same. However, using more realistic models, they find that this conclusion breaks down for two reasons.

First, drug treatments are sold after the firm has learned who has contracted the disease; in the case of heterogeneous consumers who vary with respect to the probability of contracting the disease, there is less asymmetric information to prevent the firm from extracting consumer surplus with drug treatments than with vaccines.