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Microeconomics Case Analyses in Pharmacology

Governments generally want people to get immunised against the flu and other diseases such as COVID-19. Nonetheless many people refuse to take the vaccination jab, because they overestimate the likelihood of side effects, because they are complacent about getting infected. They also might not care or understand that their immunity protects others. Use the theories of market failure and government intervention to analyse the motives of government, the anti-vax phenomenon and their consequences. What, if anything should government do to make more people get vaccinated? What would be the problems with such interventions?

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Refusal of vaccine jabs against flu viruses and SARS-Cov-2 by citizens in a country stems from asymmetric information dissemination in marketing (Davies, 2020). The targeted individuals for immunization lack sufficiently convincing information about efficacy and safety after taking vaccines, which lead to market failure. Typically, vaccines developed from the weakened forms of viruses causing diseases have side effects due to the body’s reaction in protecting itself from wild-type viruses.

Therefore, after immunization is ensured, the population’s safety is guaranteed, and marketing agencies, including the government, should ensure symmetric flow of information while reaching out to inject people. As a result, the long-term benefits of getting vaccinated, which outweigh mild reactions, are turned down by anti-vax activists (Meilich, 2021). The misinformed individuals often reject getting immunized, thus, failure in marketing the vaccine produced against flu and COVID-19.

The complacency of people concerning the severity of flu and COVID-19 infections is an externality since it builds confidence about recovering from the illnesses without being vaccinated. The anti-vax activists and hesitant people targeted for immunization often overlook the marginal social benefit conferred to the vulnerable society members when they receive the jabs. Ceasing to understand that universal protection of society from diseases through immunization is a positive externality fails to reflect the value of vaccines in the market. In addition, a person will take advantage of not being vaccinated because once the other party has received the injection, they will be protected from the virus. Thus, the government aims to ensure that all its citizens get the COVID 19 jabs terminated, translating to market failure (Meilich, 2021).

The producing companies and procuring agencies avail the product to meeting the health crisis creating economic recession worldwide. However, externalities resulting from self-satisfaction yield market failure during the vaccine distribution process.

Government interventions should focus on implementing policies to curb information asymmetry, which yield market failure. Legislation measures that eliminate anti-vax news platforms should be implemented to eradicate the chances of receiving counterfeit information through media sources. Moreover, the government should create social platforms where citizens can receive ideas to make informed decisions for the good of the community. The government can also subsidize the cost of vaccination to ensure that everyone can afford the prices charged during the injection (Jackson & Jabbie, 2019). However, centralizing media platforms and lowering services would negatively impact the revenue returns since not all people will participate in the programs.

When COVID-19 stated spreading across the world, the race was on to develop vaccines as quickly as possible. Such research & development has a high fixed cost and can only be undertaken in industries with high market concentration where firms have significant monopoly power, like the pharmaceutical industry. Examine this industry using the theory and models of industry structure. Should government be worried about any aspect of how an industry with this market structure will perform?

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The market structure of the pharmaceutical industry responsible for the development of the COVID-19 vaccine is a monopoly since it invests in the high fixed cost of investment. Researching to develop novel therapies is faced with a huge capital demand, thereby, creating barriers to competitors’ entry into the market (Durand & Milberg, 2020). Moreover, the uncertainties associated with developing vaccines from scratch acted as an obstacle to many companies from taking a risk in the business. The pharmaceutical industry invested in the production of vaccines following its financial capability, which deterred many firms from competing in the same market.

Moreover, the main object for developing a vaccine is to immunize people against a specific disease, COVID-19, which led to the homogeneity of product for sale (Durand & Milberg, 2020). Thus, the industry dominated in manufacturing and pricing the vaccine to meet demands in the healthcare system.

Monopoly power in the market allows for setting of prices by the company which provides goods and services. The industry has no competitor to influence consumers’ decision about their products through the cost of assistance given to them. The marketing process is not easily counteracted by obstacles that generally arise from fluctuating prices of products in different settings. The pharmaceutical industry has managed to generate profit from charging every shot of vaccine distributed for use in the healthcare system. Inelasticity of prices has also encouraged the scaling of economies since the privilege of mass production is enjoyed by the industry.

Moreover, monopoly has promoted innovation within the firm due to its financial strength (Durand & Milberg, 2020). Thus, being an alone producer in the market has escalated developments in the pharmaceutical industry following the privilege of developing the COVID-19 vaccine.

The government should monitor the operations of an industry in a monopoly market structure since it is associated with risks to the economy of a country. For instance, the pharmaceutical company could easily exploit people through high charges on the vaccine jabs. The chances of setting exorbitant prices stem from the advantage of being a single seller in the market. Thus, consumers become subjects of the opinions of the seller since they lack alternatives. Moreover, the industry would enact price discrimination by charging different fees in multiple locations depending on the people’s financial capacity in the region (Durand & Milberg, 2020). Therefore, it is appropriate for the government to monitor the monopoly industries’ operations.

Pfizer is one of the world’s largest pharmaceutical companies. Developing its COVID-19 vaccine is a costly, uncertain and complex process. This company would need to consider which parts of the vertical chain to outsource and which to conduct inhouse. Using the theory of the optimal boundary of the firm, discuss Pfizer’s make-or-buy decision for developing and producing its COVID vaccine. What stages of the vertical chain should Pfizer consider conducting inhouse, and which should be outsourced? Provide reasons for your findings.

The process of manufacturing a vaccine for immunization puts a company in the obligation of ensuring proper vertical integration. In advancing to produce the COVID-19 vaccine, the Pfizer company must ensure that it operates within its budget constraints.

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Therefore, developing and upscaling their vaccine for consumption must follow the make-or-buy decision. Pfizer should ensure proper installation and maintenance of equipment as part of in-house activities during production. Moreover, the technical innovation and scientific validation of the vaccine should be an in-house duty. Routine monitory of manufacturing machines’ efficiency would be expensive when the company must rely on an external supplier (Pratama & Rosyidi, 2017). Moreover, consistency of quality standards needed in COVID-19 vaccine production pins Pfizer down to ensure that scientific expertise is from experienced personnel within its capacity.

The buy-decision of Pfizer should be based on the demand of vaccine in the market to mitigate the COVID-19 crisis. The raw materials and delivery of finished vaccine doses necessitate outsourcing for supply and efforts from other companies. Vaccine production entails bulk utilization of chemicals and consumables in the working environment. Therefore, Pfizer needs to maintain a constant inflow of raw materials to achieve continuity of vaccine delivery into the market. Pfizer should make a proper decision during budgeting and procurement processes to ascertain that suppliers are dependable in the timeliness and quality of their products being delivered.

Moreover, Pfizer’s cold chain system for vaccine delivery to the point of dosing patients should be intact, with the efficient shipment (Pratama & Rosyidi, 2017). It would be necessary for the company to hire a shipping firm to facilitate finished vaccine products. Thus, backward vertical integration would assist in alleviating the complexity of work needed by Pfizer to reach the market.

Proper management of the supply chain enhances the strategies employed in simplifying the manufacturing process and reducing the chances of making losses upon marketing. Pfizer would be able to maximize output through outsourcing during the delivery of vaccines to the market. The finished products for immunization have a short lifespan upon exposure to a temperature that does not preserve biological materials. Considering buy-decision would effectively reduce the chances of incurring losses due to the expiration of vaccine doses in stores. Moreover, the company’s business would quickly be promoted, following their engagements with other internationally known firms (Salazar & Guzman, 2017). Thus, outsourcing in the vertical chain would diversify Pfizer’s primary business activity.

Consider the following hypothetical case. Only Pfizer and a competitor, Astra-Zeneca, have the ability to develop a COVID-19 vaccine. Both have access to the same two promising vaccine technologies, but each company must choose one to invest in. While each firm could develop a vaccine on its own, the problem is that the fixed cost of production and risk are very high. They are therefore considering coordinating their actions through a strategic alliance where they join forces and share cost and revenue equally. Analyse the interaction between the two firms using game theory. Present a payoff matrix to model the situation and analyse it for Nash equilibrium. What can either of these firms do to make their best, most-preferred outcome more likely?

Game theories involve applying the mathematical technique to study the behaviour of a rational entity in the market. Under the scenario, the two parties whose conducts are under consideration are Pfizer and Astra-Zeneca. The industries produce the Covid 19 vaccines, which is essential in controlling the contagious disease. The entities are to invest in one of the promising technologies to facilitate vaccine production.

However, the expensive nature of the two technologies limits the entities from purchasing them. As a result, the two organizations decide to share the high cost of buying the vaccine technologies and revenue realized from the production process. The cooperation between the two firms will translate to a strategy that leads to the best outcome (Sohrabi & Azgomi, 2020). Thus, the game theory is essential in ensuring optimization among different parties involved.

The scenario indicates Pfizer and Astra-Zeneca firms’ agreement on sharing the cost and revenue. Despite the consensus, one entity may cheat by failing to share the cost and benefit. For instance, one party may decide not to incur the charge as agreed, or the two firms may both find themselves not adhering to the consent. Therefore, a payoff matrix construction is relevant to take care of the loss of not honouring the accord. For example, I suppose the two share the cost, and then each pays $100,000, while in case one cheat, the other pays $200,000. From the above assumption, the following payoff is derived in table 1.

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Astra-Zeneca
Pfizer
Share Cost Not Share Cost
Share Cost $100,000, $100,000 $100,000, $200,000
Not Share cost $200,000 $100,000 $200,000, $200,000

From table 1 above, both the organization chose either to share the cost or not. For example, suppose the two contribute to the price, then they will incur $100,000 each. On the other hand, if one fails to share the cost, then the other firm will incur $200,000.

Pfizer and Astra-Zeneca company need to choose the strategy that will result in a lower cost incurred. The plan should not be affected by a change in the system by the other player. Through Nash Equilibrium, the best strategy is selected to obtain optimal payoff. In the payoff matrix above, suppose Pfizer shares the cost; Astra-Zeneca will share the cost. The process where the two decides to share the cost results in the highest payoff where none is tempted to adjust the strategy; otherwise, it will incur high costs.

References

Davies, C. (2020). How do we tackle vaccine hesitancy and effectively communicate vaccine safety to the general public in the COVID-19 era? Imperial Bioscience Review, 11(2), 1-3.

Durand, C., & Milberg, W. (2020). Intellectual monopoly in global value chains. Review of International Political Economy, 27(2), 404-429. Web.

Jackson, E. A., & Jabbie, M. (2019). Understanding market failure in the developing country context. In Decent work and economic growth: Encyclopedia of sustainable development goals (pp. 1-10). Cham: Springer Nature Switzerland.

Meilich, O. (2021). The Lim-O: An exercise in market failure and vertical integration. Journal of Education for Business, 1-7. Web.

Pratama, M. A., & Rosyidi, C. N. (2017). Make or buy decision model with multi-stage manufacturing process and supplier imperfect quality. In AIP conference proceedings (pp. 1-10). AIP Publishing LLC. Web.

Salazar, L. A., & Guzman, G. M. (2017). The definition of firm boundaries and its impact on sustainability. Journal of Management and Sustainability, 7(2), 126-134. Web.

Sohrabi, M. K., & Azgomi, H. (2020). A survey on the combined use of optimization methods and game theory. Archives of Computational Methods in Engineering, 27(1), 59-80. Web.

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