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Cournot Competition Under Yield Uncertainty: The Case of the U.S. Influenza Vaccine Market

Kellogg School of Management, Northwestern University, Evanston, Illinois 60201
Anderson School of Management, University of California, Los Angeles, Los Angeles, California 90095
s-deo{at}kellogg.northwestern.edu
charles.corbett{at}anderson.ucla.edu

This paper is inspired by the recurring mismatch between demand and supply in the U.S. influenza vaccine market. Economic theory predicts that an oligopolistic market with unregulated but costly entry will experience excess entry and oversupply, not the undersupply observed in the market for influenza vaccine in recent years. In this paper, we examine the interaction between yield uncertainty, a key characteristic of many production processes, including that for influenza vaccine, and firms' strategic behavior. We find that yield uncertainty can contribute to a high degree of concentration in an industry and a reduction in the industry output and the expected consumer surplus in equilibrium. We use parameter values loosely based on the U.S. influenza vaccine market to numerically illustrate the impact of yield uncertainty.

Key Words: Cournot competition; influenza vaccine; yield uncertainty; market structure
History: Received: July 18, 2007; accepted: July 15, 2008.