For diseases such as HIV/AIDS, for which individuals vary considerably in infection risk, a pharmaceutical manufacturer’s ability to extract consumer surplus differs depending on whether the firm produces a vaccine or a drug.
Vaccines are sold before consumers are infected, when consumers still have private information regarding their infection risk, whereas drugs are sold after a consumer’s infection state is realized. If consumers vary only in infection risk, drug revenue will exceed vaccine revenue. If consumers also vary in income, relative revenues are determined by the joint distribution of infection risk and income and by the manufacturer’s ability to sell advance insurance contracts. Simulations based on the distribution of infection risk and income in the U.S. population suggest that revenue from a HIV/AIDS drug may be twice that from a vaccine. We extend the analysis to allow for competition among manufacturers and for negotiated government prices.