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The Myth of Market Forces

This story in today’s Wall Street Journal (sr) makes the common mistake of confusing markets with incentives.  The article talks is about the now well-known problem that we don’t have a reliable suply of vaccines in the United States.

How is it that the U.S., known for its prowess in
producing lifesaving drugs and boasting an industry with a stock-market
value in the hundreds of billions of dollars, doesn’t have the medicine
necessary to protect itself from these public-health threats?

The same market forces that reward the production of
Lipitor, Viagra and other drugs for chronic conditions have proved a
poor way to provide some of the antibiotics and vaccines that the
public needs most. By itself, Lipitor, an anticholesterol drug, brings
in more revenue — about $12 billion this year — than the entire
vaccine market.

Now there’s a puzzle.   How can those market forces fail to provide such a crucial (and presumably valuable and therefore presumably profitable) product?  Much further down in the article, we get a hint of an answer:

In 2000, Wyeth discontinued its vaccine against
diphtheria-tetanus-pertussis and soon after began to reassess flu
vaccines. Vaccines against flu take months to produce and have to be
reformulated each year depending on which flu strains are deemed most
dangerous. When Wyeth failed to get its vaccine on the market first, it
often was forced to discard millions of doses of unsold product.

All this would have been a manageable burden if Wyeth
could have charged a high price for its flu vaccine. But government
intervention in the market made that impossible….

In 1993 a federal program was created to provide
vaccines to families who couldn’t afford them. The federal government
now buys 60% of all pediatric vaccines in the U.S., and it has often
used its buying power to drive down prices. It pays just $16.67 a dose
to Merck for a triple vaccine that protects against measles, mumps and
rubella, according to the Centers for Disease Control and Prevention.
The price for private buyers is $40.37.

Wyeth could charge only $6 a dose for its flu vaccine,
says Dr. Paradiso, who is vice president for scientific affairs and
research strategy. It pulled out of the market, which left the U.S.
vulnerable when contamination at Chiron’s flu-vaccine plant in England
forced it to shut down last year.

So government purchases and pricing has destroyed the profitability of making vaccines.  Government policy reduced the incentive to be in the vaccine business.  Wyeth’s decision to stop producing vaccines wasn’t caused by market forces.  It was caused by the interruption of market forces.

My earlier discussions of this tragedy are here, here, here and here.


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