How Does the Market for Vaccines Work?

This piece first appeared in Economics Observatory.

Effective vaccines are developed through collaboration between governments, publicly funded research universities and for-profit pharmaceutical companies. But the incentives to produce the doses can often leave out lower-income countries.

The COVID-19 pandemic is still raging across the world, with some countries such as India experiencing unprecedented infection numbers with significant effects on both population health, and social and economic wellbeing. In other parts of the world, much progress has been made in managing the disease, most notably in Israel, where almost 60% of the population has been vaccinated twice.

As the Israeli experience shows, vaccines are the best hope we have for ending the global pandemic. Research by Public Health Scotland shows that even one dose reduces the chance of the recipient going to hospital with COVID-19 by more than 85%.

While the development and manufacturing of the vaccines is a demonstration of spectacular medical and technological advances, the global rollout and distribution have led to accusations of ‘vaccine nationalism’ and tensions over uneven access to scarce doses (Auld and Toxvaerd, 2021).

For example, as of 11 May, the United States and the UK have given out 0.78 and 0.79 COVID-19 doses per head of population respectively, compared with 0.015 per capita given out in Africa. Such contrasts have shone a light on the market for vaccines, a vital multibillion-dollar industry that usually gets little attention in public conversation.

What is the nature of the market for vaccines?

The market for vaccines is unusual in a number of respects that set it apart from other industries.

First, like many other pharmaceutical products, the development of vaccines relies on a mixture of publicly funded universities, pharmaceutical laboratories and for-profit pharmaceutical giants. While much of the early research is carried out in universities, it is the pharmaceutical companies that have the funds, capacity and experience to take medical innovations from the lab through development, clinical trials, regulatory approval and finally to doctors or pharmacists who can administer them.

Second, national governments often play a role at different stages of the process. They can provide initial funding for basic research (known as ‘push-funding’) and are often the final buyers of the vaccines (known as ‘pull-funding’). In a sense, governments play the dual role of investors and buyers.

Third, the market for vaccines is unusual in that it is highly concentrated on both sides of the market. In other words, there are very few firms that produce vaccines and relatively few buyers of vaccines. Four firms accounted for 90% of global vaccine revenue in 2019, although COVID-19 has changed this.

The buyers consist mostly of national governments and national health services, as well as coalitions of buyers that engage in pooled procurement. For example, UNICEF procures vaccines for between 80 and 100 countries yearly. For COVID-19, the 27 members of the European Union (EU) have also opted to combine their procurement of vaccines.

These features of the vaccine market set it apart from others.

Why are vaccines important in the first place?

Vaccines have three main functions and while not all fulfil every function, most do:

  • First, they reduce the severity of illness for those who are infected. As a result, they can directly protect the vulnerable and help to mitigate severe health effects or even death associated with infection.

  • Second, vaccines may reduce the probability that an exposed person becomes infected in the first place as they have some immunity to the disease.

  • Third, vaccines may help to reduce the transmissibility of the disease from people who are infected to those who are susceptible. Vaccines against SARS-Cov-2 are still very new and we are thus still learning about their benefits, but early evidence suggests that they do reduce transmission of COVID-19. This benefit is likely to vary by vaccine: for example, recent Public Health England study found that a single dose of the Pfizer and AstraZeneca vaccines reduces transmission by 38% and 49% respectively.

The first two functions improve outcomes for the person who is vaccinated – they have what economists call ‘private benefits’. In addition, the latter two functions have large ‘social benefits’ because they reduce the chances that the disease will spread in the population and make others ill.

In areas where vaccinations are not widespread but illness is common, as is currently the case with COVID-19 in most of the world, the private value is very high. People will be motivated to get vaccinated to protect themselves as the disease spreads.

But vaccines are sometimes described as being ‘victims of their own success’. This is because when vaccination is widespread, rates of the disease drop within society and individuals who are not vaccinated can ‘piggyback’ off the benefits from those who are protected.

This can make the private benefits low, but social benefits high – in other words, if there is protection within society, individuals may be less motivated to get vaccinated themselves.

The fact that all of society can gain from vaccinations means that people and governments should have an interest in actively encouraging vaccine uptake. This is to protect against individual people opting out because they aren’t worried about society as a whole (see, for example, Chen and Toxvaerd, 2014).

In terms of preventing the spread of an infectious disease, vaccines achieve broadly the same results as the use of non-pharmaceutical interventions such as lockdowns or social distancing. But vaccines do so much more effectively and allow businesses to stay open and people to continue their social lives.

Avoiding the social and economic costs of non-pharmaceutical interventions against COVID-19 is the reason that public health authorities and governments around the world look to effective vaccine rollout as a viable alternative to the restrictions on which we have relied to date.

Who are the sellers?

The vast majority of vaccines routinely used in the world are ‘off patent’, and these tend to be manufactured by generic pharmaceutical makers. Off patent means that a drug or vaccine is no longer subject to patent restrictions, so that any pharmaceutical company can manufacture it as long as it demonstrates that it can do so safely.

Unlike when vaccines are subject to patents – when only the company that developed them has the right to produce them – this creates a lot of competition. Consequently, both vaccine prices and margins are very low for the vast majority of the world’s vaccines, which are no longer on patent.

Prior to the current pandemic, there were only four major vaccine companies – GlaxoSmithKline (GSK), Merck, Pfizer and Sanofi – which together accounted for 90% of the vaccine industry’s revenue in 2019, and which undertook the vast majority of the expensive late-stage vaccine research and development (R&D).

Like other areas of pharmaceutical research, small companies and the public sector play important roles in early-stage research. But at a certain stage, promising products tend to be taken over by large companies with expertise in running clinical trials, gaining regulatory approval and manufacturing the vaccines to be distributed.

Who are the buyers?

Who buys the vaccines differs from country to country and depends on the type of vaccine.

In high-income countries, there are three common types of vaccines:

  • Routine childhood vaccination, which is mostly paid for by governments.

  • Flu vaccines, which are often covered for older or more vulnerable groups, but this varies by country.

  • Travel vaccines, which are quite a lucrative market and are usually paid for by individuals.

Despite representing only 16% of the world’s population and less than 6% of global deaths from infectious diseases, high-income countries account for 82% of the global vaccine market by revenue (20% by number of vaccines). This skews the global vaccine market and innovation towards serving people in the regions where the need is lowest.

The vast majority of vaccines in low- and middle-income countries are given to children. In low-income countries and some lower-middle-income countries, vaccines are purchased predominantly by GAVI, the vaccine alliance, which works with UNICEF to get childhood vaccines to people in the world’s poorest countries. As many as 65 million children received a GAVI-supported vaccine in 2019.

As countries get wealthier, if their average gross national income (GNI) per capita over the past three years is greater than $1,630, they make a transition from GAVI funding. This transition takes place over a five-year period, with the costs of vaccines usually being picked up by the national government, as in other middle-income countries.

How are vaccines paid for and how is their development funded?

Most vaccine innovation comes from the combination of early-stage scientific grant funding from governments and market incentives that encourage all pharmaceutical research – that is, pharmaceutical companies invest knowing that they will make money from future sales.

As in other areas of drug R&D, this set-up rarely creates the incentives needed to generate important products for the world’s poorest populations. Donor funding has filled some of this gap traditionally, such as GAVI’s ‘advanced market commitment’ to a vaccine to protect against pneumonia in West Africa, where the organisation committed to purchasing $1.5 billion of the product if innovators created it. In other areas, donors have funded the research directly, such as the Gates Foundation’s funding of GSK’s research into a malaria vaccine.

The development of vaccines for COVID-19 has been an exception to normal practice. Ordinarily, it takes around a decade to make a new vaccine and before 2020, the record fastest still took more than four years: this was a mumps vaccine developed in the 1960s, responding to a virus that researchers had known about for decades and developed at a time when regulatory standards were lower than today.

Part of the reason for the length of time for vaccine development is that companies are unwilling to make large investments in developing a new product until they have a good idea of whether or not it will be successful. These delays are economically prudent for most products, where building factories, making doses or even running large-scale trials without data to support the investment is expensive.

Yet the benefits of speeding up COVID-19 vaccination production were unprecedented, both for improving health outcomes and for safeguarding the economy. Consequently, many governments invested heavily in ‘de-risking' vaccine R&D so that producers would speed up the process (as much as was safe), without worrying about the additional costs. In other words, governments stepped in and committed to fund the research, cover costs and buy vaccines at agreed prices so that pharmaceutical companies could pursue vaccine candidates with uncertain prospects without worrying about the financial consequences.

Many companies do not want to be seen to profit unduly from the pandemic and so some, such as AstraZeneca, have agreed to not make a profit on vaccine production during the pandemic or ever in low- and middle-income countries.

Other companies are earning a profit, but their prices are still well below the social benefits that flow from the vaccines. This is because each vaccine taken by a person also tends to protect others indirectly when transmission is reduced, thus creating wider social benefits to society. This indirect protective effect of vaccines is known as ‘herd immunity’ and is what economists refer to as a ‘positive externality’.

The Nobel prize-winning economist Michael Kremer, a pioneer in helping to develop the idea of advance market commitments (AMCs), estimates that in high-income countries, the benefits from a COVID-19 vaccine are between 40 and 300 times greater than the price being charged. This value comes from better health outcomes and because getting the epidemic under control allows normal economic and social life to resume.

How are vaccine development and production regulated?

Vaccines and pharmaceutical drugs are usually regulated by the same agencies, such as the Food and Drug Administration (FDA) in the United States and the European Medical Agency in the EU. But vaccines must meet much higher standards than other drugs.

This is because they are given to people who are healthy rather than to people who are ill, as is the case with other treatments. For COVID-19 vaccines to be approved in the United States or the EU, they need to be tested in trials with at least 30,000 volunteers to demonstrate both efficacy and safety.

How are vaccines valued?

As with most products, vaccine prices are set by the company or companies that manufacture them, and they do so based on a combination of what they think buyers are willing to pay and the production costs.

If a vaccine is off patent, buyers’ willingness to pay will be based on the price charged by competitors; if not, by how that purchaser values the product. While a product is still on patent, there is no effective competition and so the seller can ask for a high price if the buyer has a high valuation for it. In contrast, if the product is off patent, then competition will tend to drive prices down and buyers will benefit accordingly. Governments are typically the main purchaser of vaccines and even in countries where most medicines are bought privately, routine vaccines are usually purchased by the state.

Governments value vaccines using different mechanisms in different locations, but in much of the world, they will use formal health technology assessments. These look at the cost of an intervention compared with alternatives, and a measure of the health benefits that can be gained from each option. Then based on the required funding, a government can decide if that vaccine is cost-effective for them.

Because vaccines treat people who are in good health, there is often less political pressure to pay high prices for them. Fixing a tangible problem may appear more urgent than preventing one that has yet to materialise, and pointing to the benefits of preventive policies may be seen as less of an achievement for governments enacting them.

COVID-19 vaccines have been slightly different, in part because people are much more scared of this illness than of other diseases. As well as the health toll, this is also a result of the widespread economic damage and social disruption during the pandemic. Thus, the advantages of vaccination are felt beyond people’s health.


While there is only a handful of pharmaceutical companies that have the know-how to develop vaccines, these companies often outsource production to other companies around the world. Clearly, a successful and timely global vaccine rollout depends on the capacity to manufacture doses and to ‘fill and finish’ the vaccines in preparation for distribution. How much capacity for vaccine production is currently available?

Unfortunately, at the moment there is very limited information on the global capacity for manufacturing vaccines. The best publicly available estimates come from a survey that the Coalition for Epidemic Preparedness Innovations (CEPI) undertook in March 2020. Their global estimates were only based on the 35% of manufacturers that responded to the survey and is now a year out of date.

At the time, there was almost no RNA manufacturing capacity in the world – ribonucleic acid or RNA is the basis of several COVID-19 vaccines (including those made by Pfizer and Moderna). But the world has since manufactured more RNA vaccines against COVID-19 than from any other platform. In other words, actual capacity may be larger than originally anticipated, and can often be scaled up quickly.

Other groups such as Duke University’s Global Health Innovation Center and Airfinity, are tracking announced capacity but companies may have an incentive to inflate the numbers they believe they have for orders, or to fail to anticipate the shortage of a crucial component.

Companies have never tried to scale up production as quickly as they have for COVID-19, and often parts of the process take longer than anticipated. This can happen with components made by suppliers too, thereby delaying production. This situation is not helped by export bans, whether de facto or de jure.

Accurate global data tracking manufacturing capacity would allow us to use available resources more effectively to manufacture COVID-19 vaccines, to anticipate bottlenecks earlier and to optimise future investment in vaccine infrastructure.

Advance market commitments

For many vaccines, technology and market conditions make it unattractive for pharmaceutical companies to invest in R&D and so potentially valuable vaccines are underfunded or never developed in the first place. This is particularly the case for vaccines for diseases that are primarily prevalent in low- and middle-income countries, which have limited ability to pay.

In addition, for some of these vaccines, significant resources must be invested at early stages of the development process with the financial rewards only coming in the relatively distant future. Some companies may worry that once a vaccine reaches the market, buyers will be in a strong bargaining position and use this to drive a hard bargain and reduce the financial returns to the companies’ investments.

To ensure that these concerns don’t hold back progress in developing important vaccines, economists such as Michael Kremer have proposed and designed so-called ‘advance market commitments’ (AMCs), which gained prominence after a working group of the Center for Global Development (CGD).

AMCs are a legally binding commitment to give significant financial rewards to companies that successfully develop vaccines to meet a set of technical requirements and which countries actually want to purchase. AMCs are structured in such a way that no buyer can renege on a previous commitment to buy at a certain price, which ensures that the right incentives are in place for pharmaceutical companies to commit resources on risky candidates.

AMCs have been successfully employed for vaccines against several diseases – see Kremer et al, 2020 for a brief overview of the theory behind AMCs and the experience with implementing them over the past decade.

AMCs are an important example of ‘pull-funding’, which is paid to companies only after they have successfully reached a milestone such as approval by the US FDA or other regulatory agencies. This type of funding leaves a lot of the risk with the developer as the funder only pays in case the R&D is successful.

In contrast, ‘push-funding’, such as early-stage subsidies to R&D, transfers some of the risk to the funder, as there is no guarantee that the vaccine is successful and, say, makes it through clinical trials. The combination of different pull and push features are important aspects of vaccine procurement contracts as they tackle different aspects of the seller-buyer relationship, such as risk-sharing and asymmetric information on candidate viability and development costs.

Where can I find out more?

GAVI has a wealth of information on vaccines.

COVID-19 Vaccine Predictions: Using Mathematical Modelling and Expert Opinions to Estimate Timelines and Probabilities of Success of COVID-19 Vaccines: Report from the Center for Global Development.

This piece first appeared in Economics Observatory.



CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.

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