Welcome to the new topical insight edition of the Tulip Teacher Blog: “The 5-minute News Buster”. In these editions I will take something topical from the news and condense it into a 5-minute read. I want to take you through the complexity of these topics in simple economic terms that you will almost certainly not find in the attention-grabbing headlines of the regular news providers.
In this edition: Vaccines
- Making vaccines is a high-stakes gamble: The cost of researching and developing any new medicine, be it vaccine or not, is usually extortionate for obvious reasons:
1. It must be safe.
2. It must work.
The heavy price of research and development is an upfront cost that pharmaceutical companies must pay without clear certainty that the vaccine will meet these criteria. In other words, it is an educated high-stakes gamble. But why is this important to know? Well, economists assume that every business wants to make a profit in the long run (no brainer really!) However, this can skew pharmaceutical companies to focus on medicines (such as vaccines) for illnesses where there is “demand” in order to increase the likelihood that they can cover the high up-front costs, and potentially earn a profit in the future. This is known as a ‘positive production externality’, which is something that is good for all of society, but less likely to be produced (in this case because it is expensive and risky).
- Vaccines are like eBay items: Demand for any new vaccine may exceed supply, depending on the urgency and severity of the illness. This creates a short-term bottle neck effect where too many buyers are attempting to request the limited stock of vaccine doses. In turn, this inevitably creates supply chain issues (which I’ll raise next). Without agreements in place, pharmaceutical companies may raise the price to capitalise on the temporary problem. Think of it as an eBay item that has 20 bidders and there’s 30 seconds left, you get the idea. An interesting example of this is when a price hike notoriously occurred with the EpiPen, a life-saving jab for those with allergies. Take a look here.
- ‘Supply chain issues’ – what that means: The vaccine itself is not the only component of the product that is sent out to hospitals and GP’s. There is the packaging, the vials, maybe even the rubber lid’s that allow a needle to be inserted into the bottle, as well as all equipment needed to safely administer the vaccine. Each party involved with producing, distributing, and administering the vaccine needs to be able to fulfil the orders they receive. If one or more product(s) cannot be supplied in this chain it could halt the entire process of delivering a vaccine, until the supply of this product can once again be fulfilled (possibly by another party). Under usual conditions, where vaccines take years to prepare, any order could probably be met easily enough. However right now demand for a vaccine and all the related equipment is unprecedented, it is on a global scale and appeared in a matter of months. In other words, the pharmaceutical companies and all their suppliers literally can’t produce quick enough. This is one example of a “supply chain issue”. Not to mention all the issues involved in a globally coordinated response that involves thousands of companies. This can be described as ‘inelastic supply’ – no matter how much anyone is willing to pay, the total amount of vaccines available cannot increase instantly, it takes time and a lot of money.
- Pharmaceutical competition is your friend and foe: Pharmaceutical companies, as private organisations, can be protective over their revenue-earning products, like any other organisation would most likely be. If they are the only producer of a vaccine, they have the power to inflate the price, particularly if this is an essential vaccine. However, seeing these ‘abnormally’ high profits’ usually means that more pharmaceutical companies will attempt to create their own better vaccine. This healthy competition represents a net gain (win-win) for society as the overall supply of highly demanded vaccines should increase significantly and improve in quality. Furthermore, the power of each company to influence and potentially inflate the price of a vaccine reduces as more competitors emerge. The power transfers to buyers who have an increasing number of similar and better products to choose from. This usually results in a reduction in price. Though in reality, competitors don’t always play fairly of course.
- Transporting any medicine globally is a big issue: Transport infrastructure and logistics significantly limit the mobilisation of any vaccine. Poor quality infrastructure in any nation can increase the cost, difficulty, and duration of transportation. This pushes up costs for governments that may already have limited budgets and can reduce the likelihood of the product reaching its desired location in time. This partly explains why many curable diseases have existed much longer in developing countries where infrastructure is not as extensive.
Takeaway: Competition is a double-edged sword and not as simple as it is made out to be, especially in the pharmaceutical industry. A globally demanded urgently life-saving vaccine will create significant competition between suppliers and between buyers. This may create some difficult conversations between nations in the future.
Thankyou for reading the first edition of “The 5-minute News Buster”. Subscribe to keep up-to-date with all publications from the Tulip Teacher, discussing everything business, economics and education.