Does Reference Dependence Impact Intervention Mechanisms in Vaccine Markets?

Abstract

Prior research suggests that, to maintain sustainable health, inefficient vaccine markets need to be intervened by government subsidy. However, the effectiveness of these intervention mechanisms is often reduced by the absence of reference dependence preference. Our paper introduces this preference as the psychological disutility of overproduction and underproduction, and then uses game-theoretic way to find that reference dependence has implications on one-sided (pure demand or supply side) and two-sided intervention mechanisms. (i) The positive impact is that this preference helps both pure demand-sided and specific two-sided intervention mechanisms not only to maximize social welfare, but also to achieve diverse targets: pure demand-sided one reduces government interventions while specific two-sided ones achieves budget neutrality. (ii) The negative impact is that, although maximizing social welfare, reference dependence makes general two-sided intervention mechanisms complex. This complexity is reflected in differences in intervention’s extent (i.e., a change in payment extent used to address inefficient vaccine markets) and structure (i.e., an adjustment from subsidy alone to subsidy/tax/zero schemes). These finds guide governments with diverse targets to design the corresponding intervention mechanisms to maintain sustainable health.