DP6808 On the Optimal Production Capacity for Influenza Vaccine

Author(s): Rikard Forslid , Mathias Herzing

Publication Date: April 2008

Keyword(s): Vaccines

JEL(s): D42 , D62 , H10 , I18 , L10

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP6808.asp

This paper analyses the profit maximising capacity choice of a monopolistic vaccine producer facing the uncertain event of a pandemic in a homogenous population of forward-looking individuals. For any capacity level the monopolist solves the intertemporal price discrimination problem within the dynamic setting generated by the standard mathematical epidemiological model of infectious diseases. The monopolist thus bases its investment decision on the expected profits from the optimal price path given the infection dynamics. It is shown that the monopolist will always choose to invest in a lower production capacity than the social planner. Through numerical simulation it is demonstrated how the loss to society of having a monopoly producer decreases with the speed of infection transmission. Moreover, it is illustrated how the relationship between the monopolist's optimal vaccination rate and its time discount rate crucially depends on the cost of production capacity.