When deciding whether to invest in something, there is always uncertainty about the outcome. If ex post successes will be met with demands for reduced prices, but ex post failures do not get compensation, the ex ante expected value is reduced and firms are less likely to invest, even if it’s still worthwhile for firms that have already invested to continue operating.
Note that the tax system is better designed than this, because unsuccessful ventures generate tax loses which are (roughly) symmetrical with the taxes paid on successful ventures.
The campaign is advocating that they reduce their profit margin which given the potential sales volumes will still likely make this a profitable outcome. I am pretty unconvinced that it would serious decision relevant factor.
I think it’s pretty clear that prices falling by 50% or 67%, and gross profits falling by 71-87%, is going to be an important decision factor for various things.
I like your reasoning, but in this case I lean towards Gemma’s argument. I’m not sure how many millions of dollars were put in not only by WHO but by Gates foundation and others to ensure LMIC access, which they now have to the exclusion of any other product. The price has remained the same for years, which is unfair given the massive leg up and profits pumped into this company by the philanthopic sector.
This is a complex, not pure free market situation, and I think on balance it is more than fair that the company lowers its profit margins after making bank for years here.
Yeah aligning incentives here seems hard and tbh I don’t think it’s a sustainable option to have advocacy campaigns targeting pharma companies for every global health issue.
Quoting (on mobile so can’t seem to do the formatting):
A standard Advance Market Commitment (AMC) is a promise to subsidize the future purchase of a new vaccine in large quantities – if it’s invented – in return for the firm charging customers close to marginal cost (that is, with only a small mark-up).
Letʼs break it down. The subsidy incentivizes research by compensating innovators for their fixed cost investments in R&D and manufacturing capacity. The commitments to buy a certain quantity at a certain price ensure the vaccine is affordable and widely available. The subsidy is conditional on a co-payment (this is the part that is close to marginal cost) from governments in low and middle income countries – without it, the developer receives nothing. This incentivizes firms to develop vaccines countries will actually use, not just those that meet technical specifications.
So while patents trade-off innovation incentives with affordable access, AMCs help us achieve both. And the price strategy means that AMCs encourage deployment at scale in a way that most prizes do not.
AMCs are a kind of inversion to typical ‘push funding’ – they instead ‘pull’ innovation towards a goal by paying for outputs and outcomes. They don’t require funders to choose which research efforts to back in advance – they can just commit to rewarding the innovations that succeed. And they’ve been successful at doing so in the past.
When deciding whether to invest in something, there is always uncertainty about the outcome. If ex post successes will be met with demands for reduced prices, but ex post failures do not get compensation, the ex ante expected value is reduced and firms are less likely to invest, even if it’s still worthwhile for firms that have already invested to continue operating.
Note that the tax system is better designed than this, because unsuccessful ventures generate tax loses which are (roughly) symmetrical with the taxes paid on successful ventures.
I think it’s pretty clear that prices falling by 50% or 67%, and gross profits falling by 71-87%, is going to be an important decision factor for various things.
I like your reasoning, but in this case I lean towards Gemma’s argument. I’m not sure how many millions of dollars were put in not only by WHO but by Gates foundation and others to ensure LMIC access, which they now have to the exclusion of any other product. The price has remained the same for years, which is unfair given the massive leg up and profits pumped into this company by the philanthopic sector.
This is a complex, not pure free market situation, and I think on balance it is more than fair that the company lowers its profit margins after making bank for years here.
Yeah aligning incentives here seems hard and tbh I don’t think it’s a sustainable option to have advocacy campaigns targeting pharma companies for every global health issue.
It was interesting to read about Advance Market Commitments from this piece (https://worksinprogress.co/issue/why-we-didnt-get-a-malaria-vaccine-sooner/#advance-market-commitments)
Quoting (on mobile so can’t seem to do the formatting):
A standard Advance Market Commitment (AMC) is a promise to subsidize the future purchase of a new vaccine in large quantities – if it’s invented – in return for the firm charging customers close to marginal cost (that is, with only a small mark-up).
Letʼs break it down. The subsidy incentivizes research by compensating innovators for their fixed cost investments in R&D and manufacturing capacity. The commitments to buy a certain quantity at a certain price ensure the vaccine is affordable and widely available. The subsidy is conditional on a co-payment (this is the part that is close to marginal cost) from governments in low and middle income countries – without it, the developer receives nothing. This incentivizes firms to develop vaccines countries will actually use, not just those that meet technical specifications.
So while patents trade-off innovation incentives with affordable access, AMCs help us achieve both. And the price strategy means that AMCs encourage deployment at scale in a way that most prizes do not. AMCs are a kind of inversion to typical ‘push funding’ – they instead ‘pull’ innovation towards a goal by paying for outputs and outcomes. They don’t require funders to choose which research efforts to back in advance – they can just commit to rewarding the innovations that succeed. And they’ve been successful at doing so in the past.
I agree that AMCs seem like a good idea!