21 Jul 2021 22:30 IST

Making sense of the differential pricing of Covid vaccines

In future, vax brands can each expand market share and reap profits with high volumes

The announcement by the Government of India (GoI) that all vaccines at government hospitals will be made available free of cost to every citizen, but private hospitals can charge, with a per dose price cap of ₹780 for Covishield; ₹1,145 for Sputnik Lite and ₹1,410 for Covaxin has raised several questions: (i) Is a price warranted or should it be free to all citizens? (ii) Why should there be a price difference among the three brands? (iii) By differentiating prices, what is the signal that GoI is giving?

Why pricing?

Ideally, vaccines in the pandemic situation should be a ‘public good’ characterised by (a) non-rivalrousness meaning that use for/by one person does not reduce the availability for another, and (b) non-excludability that prevents a person from getting the benefits.

The former condition is not always possible if the supply quantity is limited. Non-excludability occurs when prices are set so high that poor people cannot afford to buy them, or if there are supply issues. By ensuring free vaccines in government hospitals,GoI has taken care of non-excludability and made it inclusive. Concurrently, it has also attempted to minimise supply constraints and expedite the process of vaccination by involving private hospitals.

For vaccinating the 1.3 billion population, assuming two doses and an average per dose price of ₹1,000, the expenditure outlay will be about ₹2.60 lakh crore. Subsidising the entire expenditure will further hurt the already stressed finances of the government. Besides, if the vaccination is going to be a regular feature until Covid is eliminated, such enormous expenditure may not be sustainable. Therefore, GoI expects the financially better off citizens who can afford private hospitals (to whom GoI is distributing 25 per cent of the vaccines) to meet their costs, and reduce the burden of GoI by about ₹65,000 crore.

Pricing strategy

In a free market, every manufacturer chooses a pricing strategy be it price skimming, market penetration, premium pricing, economy pricing, value pricing, competitive pricing or cost-plus. In the context of life- saving vaccines in the Covid pandemic situation, price skimming where prices are pegged high at a level that the market can bear initially and then lowered is illogical; as is premium pricing, and therefore both these are ruled out.

Currently, the market is not competitive as the demand is manifold higher than the supply and hence the need for ‘penetration pricing’ does not arise. The economy pricing strategy of pricing the product lower than competition, is what the Serum Institute of India (SII) appears to have adopted as reflected by its price that is nearly 32 per cent lower than Sputnik Lite and 45 per cent lower than Covaxin. In future, when competition intensifies, they would be well placed to adopt a competitive pricing strategy to expand market share and reap profits with high volumes.

The prices of Sputnik and Covaxin are pointers to a ‘cost-plus’ pricing technique. In the case of Sputnik, the vaccines are imported or manufactured by franchisees in India leading to profit pooling by the Russian supplier and the Indian manufacturer. As regards Covaxin, the cost of production appears to be high in view of a lower capacity and concomitant high fixed costs of production.

Whereas, SII has an annual capacity of 840 to 1,200 million doses at one location in Pune, the Bharat Biotech’s (BB) plant in Hyderabad is ramping up its initial annual capacity from 200 to 700 million doses at multiple locations. Obviously, therefore, BB’s fixed costs are higher, but whether that justifies the 45 per cent premium is a matter of deeper analysis. Price determination of any drug is further complicated by the element of amortisation of R&D costs that can vary widely.

Perceived value

None of the stakeholders be it governments, manufacturers or consumers are clear about the relative value proposition offered by the competing brands and so ‘Value Pricing’ is difficult to determine during these early days. Vaccine efficacy which is a value determinant is reportedly 95 per cent for Pfizer; 66 to 72 per cent for Johnson & Johnson; 91.4 per cent for Sputnik Lite; 95 per cent for Moderna; 70 per cent for Covishield; and for Covaxin, 100 per cent against severe infection; 78 per cent against mild, moderate and severe infection.

Value assessment of the Pfizer and Moderna vaccines when available in future will be more complicated in view of the substantial supply chain costs of air transportation, storage and refrigeration.

The only non-arguable premise is that the probability of hospitalisation/death to anyone who takes even one vaccine dose is significantly lowered and at this stage, people should be by and large indifferent to the brand. Notwithstanding this, one of the value differentiators that seems to have emerged especially among students who want to go abroad or come to campuses, once they resume, is the number of doses required and the gap between two doses.

In this regard, the Sputnik Lite which is a single dose vaccine and Covaxin where the recommended frequency between doses is one month against three for Covishield would be preferred in that order at the present juncture.

Price discrimination

While the foregoing puts in perspective the possible reasons for differential pricing and the relative value propositions, there is a larger question of perceived price discrimination by GoI which is now the monopoly seller to the public at large. The discriminated pricing strategy that GoI has adopted may have been forced on them by the situation but will it be perceived as being fair?

Price discrimination is a classic microeconomic pricing strategy where identical or largely similar goods or services are sold at different prices by the same provider in different markets and is an outcome of the relative costs of production.

The success of price discrimination emanates from (a) customers' willingness to pay (b) elasticity of demand (c) market power. In the fear-causing pandemic situation, customers who can afford private hospitals are more than willing to ignore the price differential as long as they get the jab. Consequently, the demand is inelastic meaning that differential pricing would have no bearing on the demand for the customer segment that it is catering to.

Since GoI is the sole supplier as per court orders, it has the market power to set different prices, although price discrimination generally leads to higher than equilibrium price in a perfectly-competitive market. As long as GoI prevents resale possibilities emanating from arbitrage opportunities, the policy is tenable.

Once herd immunity (when about 70 per cent of the population are vaccinated) is achieved, it is to be expected that the dynamics of the market exchange mechanism would alter and the process of ‘price discovery’ will commence. Price discovery entails finding where supply and demand meet, allowing transactions to occur at a price that is fair to both sellers and buyers. That could be still a year away, by when there will be greater clarity on the actual efficacies and relative value propositions of the various brands of vaccines in the market. Until then, the announced government policy and pricing mechanism appears appropriate.

(The writer is former Founder-Director, NMIMS Bangalore, and now Advisor, Rajagiri Vidyapeeth, Kochi.)