Monopoly Pricing with Negative Network Effects: The Case of Vaccines
WZB, Markets and Political Economy Working Paper No. SP II 2003-06
24 Pages Posted: 30 Nov 2003
Date Written: June 2003
We study the market for vaccinations considering income heterogeneity on the demand side and monopoly power on the supply side. A monopolist has an incentive to exploit the external effect of vaccinations and leave the poor susceptible in order to increase the willingness to pay of the rich. Even the possibility to perfectly price discriminate does not remove this incentive. Pigouvian subsidies may even make things worse. Mandatory vaccination programs covering only the poor succeed in eradicating the disease. This offers an efficiency based rationale for distribution-oriented national or international public health interventions.
Keywords: vaccination, monopoly pricing, price discrimination, negative network effects, Pigouvian subsidies, mandatory vaccination programs
JEL Classification: D42, D62, H23, I11, I18
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