In recent years, several Global Health Organizations (GHOs) have experimented with market-based procurement contracts to encourage pharmaceutical companies to bring late-stage vaccines to developing-country markets. Pharmaceutical companies often find such markets financially unattractive because the opportunity cost of capacity commitment is high, developing countries have limited ability to pay, and demand is uncertain. A contract design recently implemented by one GHO offers the manufacturer a per-dose sales subsidy, which is paid by the GHO, on top of the base price paid by developing countries. The subsidy is required because the base price is not enough, by itself, to induce the manufacturer to commit capacity for developing-country markets. A natural question that arises in this context is whether, within a fixed budget, alternate contract designs lead to higher capacity commitment. This study proposes and analyzes three contract designs that include the current practice and two alternatives inspired by contracts studied in the operations management literature. It also considers two types of budget constraints that may arise in practice and quantifies the impact of each type of budget constraint on the manufacturer’s capacity commitment. We show that the best contract design depends on the size of the budget, and that GHOs can increase capacity commitment (over the contract design used in practice) by choosing the budget-appropriate contract design and optimal parameters for the chosen design.
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© 2020 Production and Operations Management Society
- global health organizations
- market-based subsidies
- procurement contract design