Competition, Cooperation in Business Ecosystem

Term – V
PGP 2023-25

Report Submission
Roll-Out of Vaccines during Covid-19: A Game Theory Approach

Submitted to:
Prof. Rajiv Tripathi
Competition, Cooperation in Business Ecosystem
Date of Submission: 21st November 2024

Group No. 8
Ravi Sharma 2311100
Saraf Ritvik Sandip 2311090
Shashank Baheti 2311136
Hritika Aacharya 2311084
Arhantika Khera 2311133
Savaibhai Thakkar 2311119
Context – The COVID-19 pandemic catalyzed unprecedented efforts in vaccine development,
production, and distribution. All organizations & economies faced a rapidly evolving crisis, requiring
a game theory-based approach to balance health priorities with economic interests.

The timeline can be divided into several distinct phases, reflecting shifts in strategies as vaccines
became available and distribution efforts expanded. Key players in this scenario included
pharmaceutical companies, governments, international organizations, and both developed and
developing economies.

Key Phases in Vaccine Roll-Out During COVID-19

2020 2021-2023 2024
Phase 1: Production Phase 2: Distribution Phase 3: Sanctions

Phase 1 in 2020: Development and Initial Production

1. Race to Develop a Vaccine - Pfizer & BioNTech
o Pfizer partnered with BioNTech and Fosun Pharma to expedite vaccine trials as they realized
that collaboration could shorten the development timeline and distribute costs and risks. Unlike
before, the scale of urgency and the potential for international funding influenced this cooperation.
o We observe the dynamics of co-opetition & the classic prisoner’s dilemma pre-Covid. However,
there is a change in Nash Equilibrium during Covid-19 due to enhanced payoffs. Nash bargaining
model has been used to divide the gains.
2. Public-Private Partnerships - Indian government, Bharat Biotech
o Governments evaluated whether to offer financial backing in exchange for priority access and
accelerated development. Companies, on the other hand, decided whether to relinquish patent
control for increased availability.
o This situation mirrors a classic single game with each party weighing their choices & choosing a
strategy.

Phase 2 in 2021-23: Distribution Strategies

3. Initial Donation Promises by Economic Powerhouses – United States & China
o Both the US and China had ample vaccine supplies to meet their domestic needs. With Africa still
battling high infection rates, these economies faced the decision to donate vaccines to
underdeveloped African countries, which could boost health & bilateral trade. However, donation
of vaccines will incur a financial cost.
o The economies follow repeated games, with choice between donating & not donating vaccines.
4. Reneging on Promises by Economic Powerhouses – United States & China
o With the revival of their own economy the new priority, these economies faced very low discount
factors in the same repeated games, resulting in change in their decisions of vaccine donations.

Phase 3 in 2024: Geopolitical Tensions: Bio-Security Sanctions - U.S., China, and international
actors.
o Bio-security concerns led the U.S. to impose sanctions on China, to limit certain trade and protect
genomic access.
o In this zero-sum game, Shapley value calculations reveal shared losses to both China & U.S.
Meanwhile, other nations will leverage these tensions, acting as the middle agent.
Case 1 - Race to Develop a Vaccine
Relationship between competitive pharmaceutical companies changed from pre-covid to Covid-19
period.
Players:
i) Pfizer: Large player, vast distribution network
ii) BioNTech: Relatively smaller player, competence in R&D of mRNA technology, focus on key
geographies for distribution

Strategies for each player:

i) End-to-end vaccine development including R&D and distribution, both
ii) Focus on own core competence and partner for other aspects of vaccine development

Payoffs
Pre Covid-19
(in $ billions) BioNTech: End-to-end BioNTech: Only R&D
Pfizer: End-to-end 10, 0.02 15, 0.01
Pfizer: Only Distribution 7, 0.05 13, 0.032

Irrespective of the other player, each firm will choose to invest in End-to-End strategy as per prisoner’s
dilemma. Companies like Pfizer have no incentive to share risk with mRNA tech companies, as the risk
is very high.

During Covid-19
(in $ billions) BioNTech End-to-end BioNTech Only R&D
Pfizer: End-to-end 10, 0.02 15, 0.01
Pfizer: Only Distribution 7, 0.05 35, 20

As urgency of vaccine development increased during covid, time to market became a critical
consideration. With each firm focusing on its core competence and partnering, the time to market could
be reduced significantly. Hence, we see, during covid-19, the Nash equilibrium shifts to cooperation
between the 2 firms.

Actual Case: Pfizer entirely funds mRNA technology development by BioNTech, the returns are shared
between Pfizer and BioNTech with returns capped for the latter.
Reason: Pfizer with vast manufacturing and distribution capabilities was better poised to extract value
out of the developed vaccine, therefore Pfizer set the terms of the contract and payoff for BioNTech
was capped. Payoff depends on likelihood of vaccine rollout, which depended on Pfizer.

Payoff of BioNTech is capped at $563 Mn as per one contract by Pfizer, while entire R&D of $185
Mn is invested by Pfizer. There were multiple contracts across the year.

Nash Bargaining Solution

The total net profit raked by big pharma from the covid-19 vaccine is estimated to be 90Bn.1
The size of market that Pfizer+BioNTech can capture together was expected to be 60% of the market
(approx. 55 Bn)1

To understand the spilt of the 55 Bn between the two players, we look at their utility function and risk
capacity.
Utility function: As Pfizer is an incumbent player with stable revenue and accessible capital, it is less
risk averse, and will want a higher share in the payoff as risk premium, and we assume its utility
function is linear, with 𝑢(𝑥) = 𝑥
On the other hand, BioNtech is a small player, making losses since inception (up till 2022), it will be
more risk averse, and have a concave utility function, with 𝑢(𝑥) = 𝑙𝑛(1 + 𝑥).

Bargaining Power: As BioNtech is the firm with mRNA specialization, a key capability needed to
develop the covid vaccine in 2020, it is the less replaceable party in the partnership, and commands a
higher bargaining power, assumed to be 60%.
Pfizer, while important, is only offering distribution capabilities, also offered by many competitors
like Moderna. Therefore, it has less bargaining power, assumed to be 40%.

Payoffs at Disagreement Point: Projected revenues on the basis of 5Y average CAGR was taken.
Thus, Pfizer has a payoff of $13B while BioNTech has an estimated payoff of $ 32Mn or $ 0.032 Bn.

Pfizer BioNTech
Payoff x 55-x
Risk Capacity Risk Neutral Risk Averse
Utility Function x Ln(1+x)
Payoffs at Disagreement Point 13Bn 0.032Bn
Bargaining Power Low High
Bargaining Power Function 40% 60%

Modeling the Bargaining Solution,

𝑀𝑎𝑥!",!$ (𝑥" − 𝑑" )% (𝑥$ − 𝑑$ )"&%
𝑠. 𝑡. 𝑥" ≥ 𝑑" , 𝑥$ ≥ 𝑑$ , (𝑥" , 𝑥$ ) ∈ 𝑆
𝑀𝑎𝑥 𝑥 ∈ [0,55] (𝑥 − 13)'.) 𝑙𝑛(1 + 55 − 𝑥 − 0)'.*
(𝑥 − 13)'.) [𝑙𝑛(56 − 𝑥)]'.* )
⇒𝑑 =0
𝑑𝑥
1 1 0.3
⇒ 0.7 × '.* × [𝑙𝑛(56 − 𝑥)]'.* − (𝑥 − 13)'.) ∗ ∗ =0
𝑥 [ln (56 − 𝑥)] '.) (56 − 𝑥)

⇒ 𝑥 = 36.62 𝐵𝑛 (Payoff for Pfizer)

55 − 𝑥 = 18.38 𝐵𝑛 (Payoff for BioNTech)

Actual profits for the firms are

Pfizer = $ 35 Bn
BioNTech = $ 20 Bn

These are the payoffs received by both the firms over the duration of 2021-2023 across all the
contracts between them.1

1
Centre for Research on Multinational Organisations –
https://www.somo.nl/big-pharma-raked-in-usd-90-billion-in-profits-with-covid-19-vaccines/
Case 2 – Public-Private Partnerships
We aim to analyse collaboration scenarios between the Indian government and Bharat Biotech in
COVID-19 vaccine development. The decision variables in this context were:

Decision Variables:
1. Government Funding: Can facilitate vaccine development and speed up distribution.
2. Private Patent Stance: Bharat Biotech can choose to maintain the patent, restricting production to
exclusive markets, or nullify the patent, thereby, extending licenses which would increase
availability but decrease profitability.

Methodology - Game Theory and Payoff Matrix are applied to analyze the strategic interactions
between the Indian Government and Bharat Biotech.

Equations
(-./ 01223415364 715. & 819.:34. 715.)
• Vaccination Rate Improvement (VRI) per month =
819.:34. 715.
∗ 100
• Revenue Impact: ΔR

Bharat Biotech (BB) willing to Bharat Biotech (BB) not willing to

license license
G: 10% VRI G: 5% VRI
Government (G) Moderate cost; quickest recovery Assured but limited vaccine access
willing to fund PP: Rs. 6,000 Cr2 PP: Rs. 12,000 Cr
Inc. capital but high competition Exclusive market – highest revenue
G: 8% VRI G: 4% VRI
Government (G) No cost; delayed public access No cost; slow recovery
not willing to fund PP: Rs. 5,000 Cr PP: Rs. 10,000 Cr
Increased comp. High costs but exclusive market

Both Bharat Biotech and the Government have dominant strategies:

• Bharat Biotech’s dominant strategy is to maintain the patent because it results in higher revenue
• The dominant strategy for the Government is to offer funding, as it results in a higher VRI.
• Nash Equilibrium occurs when both the Government offers funding and Bharat Biotech retains
the patent.

However, the Indian Government recognizes the higher Vaccination Rate Improvement (VRI) with
patent nullification and funding. This strategic move leads to higher VRI, benefiting the nation as a
whole.

In response to public health needs, the Indian Government decided to waive the patent for Covaxin,
prioritizing VRI over economic profits. The Government’s higher power pushed the firm to comply.

‘India, Pakistan, South Africa, and five countries have jointly proposed a five-year global patent
waiver for Covid-19, backed by 65 members including United States, China and Russia.’ -WTO

Under the Atmanirbhar initiative, the Indian government provided 65 crore rupees funding for the
vaccine's development & Bharat Biotech had to allow local manufacturers to produce patented vaccines.

This situation illustrates that Game Theory equilibrium does not always hold when one player holds
significantly more power than the other

2
ICRA Report
Case 3 - Vaccine Donation Promises by Economic Rivalries
We analyse the repeated game setup involving economic rivals (USA and China) providing vaccines
to underdeveloped African countries. These countries are key to boosting trade and fostering
economic growth for both the USA and China. The game repeats across monthly rounds, with each
country deciding whether to send doses to Africa or not.
Assumptions:
§ Payoffs:
• Both the USA and China incur a cost for sending vaccine doses to Africa.
o USA's Cost: $250M per month (40M doses at $6.72 per dose)3
o China's Cost: $200M per month (30M doses at $6.72 per dose)3
• If either country sends doses, both receive benefits due to economic stability and continued
trade opportunities in Africa.
o USA's Benefit (B): $400M per month (10% of its monthly trade of $4B)4
o China's Benefit (B): $2000M per month (10% of its monthly trade of $20B)
o Irrespective of which country sends doses, Africa is likely to engage in maximum trade
with both countries.
• If neither sends doses, both face a severe pandemic-related cost (S), assumed to be minimal
$50M per month, representing worsened global health & stability risks.

§ Discount Factor, δ: Both players discount future payoffs, and the game’s repeated nature implies
that they consider future consequences of current decisions (i.e., the probability of cooperation in
the future).

The game is repeated across monthly rounds, representing multiple decision periods. In each round,
players decide whether to send doses to Africa or retain them.

We look at two scenarios:

1. Continued Co-operation - Both countries send doses every round, resulting in a payoff given in
the below matrix.
2. Grim Trigger - A country might initially be tempted to defect (by not sending doses) while the
other country cooperates. This defection yields a one-time higher payoff for the defector.
However, as a deterrent, the other country will stop sending doses in response, leading to a
scenario where neither country sends doses from the following round onward.

To maintain cooperation, each player must prefer the long-term benefits of cooperation over the one-
time gain from defection. Thus, the present value of cooperating indefinitely must outweigh
the present value of defecting once and then reverting to mutual defection. The present value of
cooperation is calculated as shown below:
<66=.>15364 ?1@6AA
Present Value of Cooperation = "&B
(𝛿 = discount factor)

We have created a payoff matrix based on the action taken by US and China:
(in $ Millions) China Sends China Does Not Send
USA Sends USA: 150 (B – C), USA: 150 (B – C),
China: 1800 (B – C) China: 2000 (B)
USA Does Not USA: 400 (B), USA: -50 (S),
Send China: 1800 (B – C) China: -50 (S)

3
Organisation for Economic Co-operation & Development Report
https://one.oecd.org/document/DCD/DAC/STAT(2021)29/REV1/en/pdf
4
US-Africa Trade = $ 46.7B, China-Africa Trade = $ 262B as per WTO
 o If Both Send:
o USA: $400M − $250M = $150M per month
o China: $2000M − $200M = $1800M per month
o If Only One Sends:
o The sender incurs the cost while the non-sender reaps the full benefit.
o USA: $400M (if China sends, USA doesn’t)
o China: $2000M (if USA sends, China doesn’t)
o If Neither Sends:
o Both incur the pandemic cost of −$50M.

Determining the Discount Factor (δ):

To maintain cooperation, the inequality below must hold:
𝐶𝑜𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛 𝑃𝑎𝑦𝑜𝑓𝑓 𝐹𝑢𝑡𝑢𝑟𝑒 𝑃𝑢𝑛𝑖𝑠ℎ𝑚𝑒𝑛𝑡 𝑃𝑎𝑦𝑜𝑓𝑓
≥ 𝐷𝑒𝑓𝑒𝑐𝑡𝑖𝑜𝑛 𝑃𝑎𝑦𝑜𝑓𝑓 (𝑖𝑚𝑚𝑒𝑑𝑖𝑎𝑡𝑒 𝑏𝑒𝑛𝑒𝑓𝑖𝑡) +
1−𝛿 1−𝛿

Cooperation Payoff:
• USA: $150M per round
• China: $1800M per round
Defection Payoff (for one-time defection):
• Immediate benefit for the USA: $400M
• Immediate benefit for China: $2000M
Future Punishment (mutual defection):
• USA: −$50M per round
• China: −$50M per round

The inequality for cooperation is:

"C' &C'.B
"&B
≥ 400 + "&B

We get, discount factor (δ) = 0.4.

Conclusion: Both co-operate & promise to send doses.

For both the USA and China to find it beneficial to cooperate (by sending doses), they need a discount
factor of at least 0.4. This means both countries must value future payoffs at least 40% as much as
current payoffs.

Given the high stakes involved in maintaining African trade and current prioritization of healthcare
over economy, it is likely that both countries will maintain cooperation by sending vaccine doses each
month. The long-term benefits of cooperation outweigh the one-time gain from defection, encouraging
both countries to maintain cooperation across repeated rounds.
Case 4 – Reneging on Promises by Developed Economies
When the discount factor decreased due to a looming recession and reduced urgency in healthcare
from higher immunization rates, both the USA and China became less focused on future gains.
Instead, they prioritized immediate economic concerns, putting their vaccine promises to Africa on
hold.
With a lower discount factor, the value of future payoffs dropped significantly. This made both
countries focus more on present benefits—strengthening their own economies—over fulfilling
healthcare commitments abroad. As a result, both countries defected, breaking their promises.
For example, the USA and China are now expected to have a surplus of 1.4 billion vaccine doses.

‘G7 countries will have 1.4 billion surplus doses by August 2022, even after giving all adults a
booster but are failing to deliver on donation pledges. The US has delivered just a quarter of the
vaccines it promised to donate.’ - Oxfam International

The graphs below illustrate the trends in vaccine donations by China and the United States over time.
Notably, they highlight a pivotal shift in April, when China first reneged on its vaccine donation
commitments, followed by the United States in July.5 6

‘Fourteen countries in Africa have yet to surpass the critical benchmark of vaccinating more than
10% of their total population with their primary vaccine series, as a dramatic decline in vaccine
donations from major economic powerhouses leaves millions unprotected.’ – WHO

5
US Statistics from US State Department - https://www.kff.org/coronavirus-covid-19/issue-brief/u-s-international-covid-
19-vaccine-donations-tracker/#:~:text=The%20U.S.%20has%20pledged%20to,as%20new%20data%20are%20released.
6
China Statistics from UNICEF - https://www.unicef.org/supply/covid-19-market-dashboard
Current Scenario - Geopolitical Tensions: Bio-Security Sanctions
The BIOSECURE Act restricts U.S. government contracts with biotech firms linked to foreign
adversaries, including China, North Korea & Russia. We will be focusing on the act’s impact on
China, to safeguard national security. This legislation impacts various stakeholders: US government &
firms, Chinese firms, international player (i.e. players such as Europe, India, Japan).

This legislation would prohibit federal agencies from procuring, purchasing, or obtaining
biotechnology equipment or services from a biotechnology company that is controlled or operated on
behalf of a foreign adversary, most notably China. This includes several explicitly named Chinese
companies and entities associated with those companies or the Chinese government.

S 3558 lists the following entities as “biotechnology companies of concern”: BGI, MGI, Complete
Genomics, and WuXi AppTec. HR 8333 lists these entities as well as WuXi Biologics. Both bills give
the federal government wide authority to name other entities in the future.

Players Involved
Let N = {U, C, I} represent the set of players:
- U: United States (the boycotting country)
- C: China (the boycotted country)
- I: International player (country or company not directly involved in the boycott)
Top international players considered here are Novartis, Novo Nordisk A/S, BioNTech SE.

• Payoff Functions Before the Biosecure Act (in billions)6

v(U) = 0 Countries v(UC) = 4 An estimate of the trade in biotech between US and China
acting based on the Chinese firms mention in the Act
v(C) = 0 individually v(UI) = 39 Trade between US and international market (Considering
have zero top biotech firms outside US)
v(I) = 0 payoffs v(CI) = 6 Trade estimate between China and international partners
v(UCI) = 49 Collaborative trade among all three players results in maximum benefits.

“The Shapley value of the above scenario is (21.5, 5, 22.5).”

• Payoff Functions After the Biosecure Act (in billions)

v(U) = 0 v(UC) = 0 No trade whatsoever between US and China.
Countries
v(C) = 0 v(UI) = 42 Trade is possible between the U.S. and international partners
acting
without involving China, assume 75% of it (3) has shifted to
individually
international markets after the sanction
have zero
v(I) = 0 v(CI) = 7 Increased trades between China and international partners
payoffs
fills some gaps left by U.S. sanctions.
v(UCI) = 49 Collaborative trades among all three players remains unchanged but
occurs through different channels, major increase is seen in increased
trade between US and international market.

“The Shapley value of the above scenario is (21,3.5, 24.5).”

Insights Derived from Analysis
1. United States (U): The U.S.
loses valuable partnerships
and innovations from
Chinese firms due to its own
sanctions.
2. China (C): While losing a
major market, China suffers
a greater economic loss due
to reliance on the U.S and
difficulty in pivoting trade through other countries..
3. International Partners (I): These entities benefit by filling supply gaps left by reduced Sino-
American collaboration, leading to lower prices and increased market opportunities.

Future Implications and Suggestions

1. China’s Higher Economic Losses: The BIOSECURE Act imposes greater economic costs on
China compared to the U.S., with China facing nearly double the losses. This disparity may
weaken China’s ability to sustain its market dominance, positioning the U.S. to emerge
stronger in the long term.
2. Growth of Domestic Players: By reducing dependence on Chinese firms, the U.S. can
accelerate the growth of in-house industries, fostering innovation and creating jobs within the
country, thereby strengthening its domestic economic ecosystem.
3. Opportunities for Strategic Alliances: With China pivoting to other partners, the U.S. can
focus on enhancing collaborations with allied nations, building resilient supply chains, and
ensuring long-term strategic advantages.
4. International Market Leadership: As China faces greater disruptions, U.S. firms can
leverage this opportunity to expand their presence in global markets, gaining a competitive
edge in sectors like technology, pharmaceuticals, and advanced manufacturing.

In summary, the BIOSECURE Act not only safeguards U.S. interests but also positions it for long-
term economic growth by leveraging China’s higher losses to its advantage.
6
Appendix: How are payoffs calculated?
The companies which are currently banned under biosecure act:
MGI

WuXi AppTec

BGI

Total trade between US and China for the companies in concern: Approx. $ 4,000 mn

Top 3 international companies:

Novartis:

Novo Nordisk A/S:

BioNTech SE:

Total trade between US and top 3 international companies: Approx.: $ 39,000 mn

Total trade between China and top 3 international companies: Approx.: $ 6,000 mn