Market Shaping: Funding Innovation for Global Challenges

Many of the world’s most pressing problems—climate change, pandemics, antimicrobial resistance, and extreme poverty—require breakthroughs that markets alone often do not deliver. The basic issue is simple: private profits and social benefits often diverge, so firms underinvest in the innovations that matter most for humanity.

Market shaping is a family of tools and strategies designed to close that gap by reshaping incentives rather than replacing markets altogether. Instead of hoping that good technologies will eventually become commercially attractive, market shaping creates credible promises of future rewards that make it worthwhile for companies and researchers to invest now.

From Market Failures to Market Shaping

Traditional economic policy often starts from the observation that markets fail in predictable ways: externalities, public goods, information asymmetries, and monopoly power all distort outcomes. Climate change is a textbook example: carbon-intensive technologies impose large costs on society that are not fully borne by emitters, leading to excessive emissions and underinvestment in clean technologies.

Market shaping does not try to fully redesign the economic system. Instead, it asks a narrower but powerful question:

• Where are commercial incentives too weak relative to social value?
• What simple commitments could realign rewards with impact?
• How can governments and philanthropies use their purchasing power and credibility to change expectations?

In this sense, market shaping is pragmatic: it accepts that the private sector is often better at discovery, experimentation, and scale, but recognizes that it will only direct its efforts where there is a clear path to profit.

Push vs Pull: Two Ways to Finance Innovation

Most public funding for innovation uses what economists call push mechanisms—funding inputs like research grants, tax credits, or public labs. Market shaping focuses on pull mechanisms—paying for successful outputs instead of promising money up front.

Push and pull are complements, not substitutes. Basic research still needs grant funding, but pull mechanisms can be powerful when:

• There is a clear social objective (e.g., a vaccine, clean cement variant, or carbon removal technology).
• Markets alone are unlikely to deliver fast enough because early adopters cannot capture enough of the global benefit.
• Governments or philanthropies can make a credible future commitment to pay if the goal is met.

Core Market Shaping Tools

Within the broad category of pull mechanisms, several specific tools have proven especially influential in global health and are now being adapted to climate and pandemic preparedness.

Advance Market Commitments (AMCs)

An Advance Market Commitment is a legally binding promise by funders to buy a certain quantity of a product at a set or formula-based price if it meets pre-agreed performance criteria.

• The commitment is announced before firms invest heavily in R&D.
• The product must meet quality, safety, and effectiveness standards.
• In many designs, participating firms agree to sell at close to marginal cost after the subsidized quantity has been met, ensuring broad access.

AMCs were notably used to accelerate the development and supply of pneumococcal vaccines for low-income countries, combining a guaranteed market with conditions on pricing and supply. They are now being explored for:

• Cleaner industrial processes (e.g., low-carbon cement and steel)
• Carbon removal technologies
• Broad-spectrum antivirals and improved COVID-19 vaccines

Advanced Purchase Agreements and Volume Guarantees

Advanced purchase agreements and volume guarantees are simpler relatives of AMCs. Here, buyers commit in advance to purchase a specified quantity of a product that either already exists or still needs improvement.

Compared with open-ended R&D subsidies, these tools:

• Provide revenue certainty so firms can invest in capacity.
• Reduce the risk of stranded investments if demand turns out lower than expected.
• Can be conditioned on performance (e.g., maximum emissions, cost thresholds, or clinical endpoints).

Prizes and Milestone Payments

Innovation prizes are one-off rewards for achieving a clearly defined goal—such as hitting a technical performance benchmark or demonstrating a solution at scale. They are flexible and technology-neutral but often small relative to the cost of serious R&D.

Milestone payments split rewards into stages—early proof of concept, prototypes, regulatory approvals, and deployment. This can:

• Reduce the capital firms must raise upfront.
• Allow funders to stop backing weak projects earlier.
• Encourage more entrants by lowering the bar for initial participation.

Why Markets Alone Underinvest in High-Impact Innovation

Several structural features of global challenges make them poorly suited to purely commercial incentives.

Global Externalities and Free-Riding

When a country invests in low-carbon technologies or pandemic preparedness, much of the benefit spills over to the rest of the world. However, most policy instruments—like carbon pricing—are set based on domestic social costs. As a result:

• Global benefits far exceed the local value that any one country can justify paying for.
• Innovations that would be hugely valuable worldwide may still be commercially unattractive in any single market.

This explains why relying solely on national-level regulations and carbon pricing is unlikely to generate sufficient innovation in areas like low-carbon cement, steel, or breakthrough vaccines.

Risk, Uncertainty, and Long Time Horizons

Many climate and health technologies require large upfront investments with uncertain payoffs that may be decades away. Private investors discount distant and uncertain rewards more heavily than society as a whole, especially when:

• Regulation and carbon prices are politically unstable.
• Future demand trajectories are unclear.
• There is a chance of being outcompeted by a different technology pathway.

AMCs and similar tools address this by turning uncertain, diffuse future value into a concrete, contract-based revenue stream that firms can use to justify investment.

Monopolies, Patents, and Access

Standard patent-based incentives can also underperform. While patents reward inventors, they can also lead to high prices and slow diffusion, especially in low-income settings. Market shaping tools are often explicitly designed to:

• Reward innovation generously.
• Require affordable pricing and sufficient capacity as a condition of payment.
• Prevent long-term monopolies from blocking access.

Design Principles for Effective Market Shaping

Good market shaping design is not just about the size of the commitment; it is about getting the incentives right so that firms respond in the desired way.

Clarity and Credibility

For firms to invest, the rules of the game must be clear and perceived as reliable.

• Performance criteria, measurement methods, and eligibility rules should be simple and objective.
• Contracts or institutional guarantees must be strong enough that companies believe they will be paid if they succeed.
• Governments and philanthropies may need to pool resources to reach sufficient scale.

Technology Neutrality and Flexibility

Funders rarely know in advance which scientific pathway will work best. Overly prescriptive rules can exclude promising ideas. Effective market shaping therefore:

• Specifies outcomes (e.g., emissions per ton of cement, vaccine efficacy) rather than methods.
• Allows multiple firms and approaches to compete.
• Avoids criteria that accidentally favor incumbent technologies.

Adequate Scale

To change investment decisions at major firms, commitments must be large enough to move expected returns meaningfully. Research on AMCs for climate shows that:

• Small prizes or symbolic commitments rarely shift corporate strategy.
• Subsidies need to cover a significant share of the innovation and scale-up cost to have real impact.

Integration with Broader Policy

Market shaping works best when combined with other tools:

• Carbon pricing, regulation, and standards to create ongoing demand for clean technologies.
• Public research funding to expand the pipeline of scientific ideas.
• Procurement reforms that allow governments to act as smarter lead buyers.

Applications: Climate, Health, and Beyond

Organizations like the Market Shaping Accelerator at the University of Chicago are working to identify the highest-impact settings for these tools and design concrete proposals.

Climate Change and Green Industrial Innovation

Decarbonizing heavy industry is a leading example where market shaping could make a difference.

• Cement and steel: These sectors are responsible for a large share of global emissions, yet low-carbon alternatives are often more expensive, and buyers have weak incentives to switch.
• Carbon removal: Technologies that remove CO₂ from the atmosphere provide a global public good, but individual buyers cannot capture most of the benefit.

Research by climate economists argues that AMCs and similar tools could overcome these barriers by guaranteeing a future market for cleaner variants that meet emissions and cost targets.

Pandemic Preparedness and Global Health

The COVID-19 pandemic highlighted both the promise and limitations of existing systems.

• Massive public investment and advance purchase agreements helped accelerate vaccine development at unprecedented speed.
• At the same time, unequal access and production bottlenecks revealed design flaws in how incentives and manufacturing capacity were organized.

Building on earlier successes with vaccine AMCs, experts are now exploring market shaping for:

• Universal or broadly protective coronavirus vaccines.
• Broad-spectrum antivirals that can target multiple pathogens.
• Rapid surge manufacturing capacity that can be repurposed in emergencies.

Other Global Public Goods

Beyond climate and pandemics, market shaping ideas are gaining traction in areas like antimicrobial resistance, agricultural innovation, and clean cooling technologies. The common pattern is:

• High global social value.
• Weak or fragmented commercial demand.
• A role for large, credible funders to coordinate expectations.

The Role of Institutions and Collaboration

Effective market shaping requires collaboration between researchers, policymakers, private firms, and philanthropies.

• Academic groups model the economics of different designs and quantify social benefits and costs.
• Governments and multilateral institutions provide legitimacy, legal frameworks, and often the bulk of funding.
• Industry partners bring technical expertise, cost data, and implementation capacity.

New initiatives such as the Market Shaping Accelerator at the University of Chicago aim to serve as a bridge between rigorous research and real-world policy proposals that are politically and institutionally feasible.

Common Misconceptions About Market Shaping

Because market shaping is relatively new outside global health, it is often misunderstood. Some frequent misconceptions include:

• “It replaces regulation or carbon pricing.” In reality, it is a complement, targeting innovation and scale-up rather than ongoing emissions or safety standards.
• “It picks winners.” Well-designed mechanisms reward outcomes, not preselected technologies, and let firms self-select based on their private knowledge.
• “It is just bigger subsidies.” The difference lies in timing (paying after success), conditionality, and the use of credible commitments to shift expectations.

Frequently Asked Questions (FAQs)

Q: How is market shaping different from traditional industrial policy?

Traditional industrial policy often focuses on subsidizing specific sectors or firms, sometimes with limited transparency about expected outcomes. Market shaping instead starts from a clearly defined social objective, sets outcome-based conditions, and allows any firm that meets those conditions to benefit, which can reduce favoritism and encourage competition.

Q: Does market shaping only work for rich countries?

No. Many of the most prominent examples, such as vaccine AMCs, were explicitly designed to serve low- and middle-income countries by combining donor funding with commitments to affordable pricing and adequate supply. Pooling resources across rich and poorer countries can increase the scale and effectiveness of these instruments.

Q: Who pays for market shaping commitments?

Funding typically comes from a mix of national governments, multilateral organizations, and private philanthropies. Because the social benefits are global and long-lasting—such as avoided climate damages or pandemic losses—economic analyses often find that well-targeted AMCs can yield very high benefit–cost ratios compared with many forms of public spending.

Q: Aren’t patents enough to incentivize innovation?

Patents can work well in some markets, but for global challenges with large spillovers and limited ability to pay—especially in low-income settings—patent incentives alone are often too weak or create affordability problems. Market shaping tools can top up incentives while also conditioning rewards on broad access and reasonable pricing.

Q: How do we know if a market shaping program has worked?

Evaluation focuses on whether the commitment changed behavior: did it accelerate innovation, bring new entrants into the field, lower prices, or increase adoption compared with plausible alternatives? Researchers use economic modeling, counterfactual scenarios, and empirical data on R&D, deployment, and prices to assess impact.

Written by

Medha Deb

Medha Deb is an editor with a master's degree in Applied Linguistics from the University of Hyderabad. She believes that her qualification has helped her develop a deep understanding of language and its application in various contexts. Medha specializes in the areas of beauty, health, sports, and wellness and is committed to ensuring that the content on the website is…