AMC, it’s easy as 1,2,3.

Owen Barder, in another thought-provoking post (this time on GAVI), has a nice explanation of the rationale behind advance market commitments for vaccines.

Long term commitments are important because without them, vaccine manufacturers are vulnerable to “hold up“, a problem familiar in the economics literature on industrial organisation and utility regulation.  Manufacturers face the risk that, once they have invested in developing a new vaccine, getting regulatory approval, and spending hundreds of millions of dollars putting in place large-scale manufacturing capacity, the donors will then gang together to use monopsony purchasing power to drive down the price to around the marginal cost, ignoring the sunk costs of developing and producing the vaccine. At marginal cost pricing, the manufacturer never recovers the cost of their investments. 

After the vaccine has been manufactured, this is a rational thing for donors to do, since it reduces the price to a level at which the largest number of vaccines can be purchased.  But before the vaccine is manufactured, the vaccine companies anticipate the likely future behaviour of donors, given the donors’ incentives; and this undermines the investment case for developing and producing vaccines for the developing world.   Donors can avoid this by entering into a long-term commitment which prevents them from driving down the price later on.

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