Atlas of Innovation

Definition

An advance market commitment (AMC) is a guarantee to subsidize or purchase a future product that meets pre-specified technical requirements at a pre-specified price. Any innovator who develops and sells the target product would receive a payment per unit from the funder.

AMCs function similarly to [[per-unit subsidies and tax credits]]; but rather than focus on existing products, AMCs target products that have yet to be invented.

Why might an AMC be the right funding approach?

AMCs are most useful when there is a clear vision of the needed innovation, and funders want to incentivize both its development and widespread delivery. AMCs are particularly well-suited for situations where funders want to remain agnostic about which innovators or technologies will best meet the specified needs. They work by guaranteeing market returns that allow companies to recoup high upfront research and development (R&D), manufacturing, and/or implementation investments.

AMCs work best when the target innovation has one or more of the following characteristics:

Clear product specifications: AMCs require funders to precisely define the technical targets upfront (such as a vaccine with specific efficacy targets), but the scientific or technical approach to meeting these requirements can remain flexible. The formal list of technical specifications is called a “target product profile.” An AMC’s technological agnosticism can reward the best outcome from diverse, innovative approaches.
Manufacturing speed and scale: For innovations requiring specialized production expertise or substantial investment in manufacturing capacity, AMCs encourage companies to build capacity quickly and invest in efficient, high-quality production processes because payment is tied to adoption.
End-user tailoring: Since payment depends on actual purchases, AMCs incentivize innovators to develop products that work well in real-world conditions and meet end-user preferences, not just the target product profile — considering factors like storage requirements, ease of use, and local constraints.

AMCs offer important advantages over other funding approaches:

Openness to diverse technological approaches: Any company that meets the requirements can receive the reward, eliminating the need for a funder to predict which innovator or technology will be most effective ahead of time. This approach encourages private actors to leverage their private information to identify and invest in the solutions most aligned with the target product profile.
Pay only when successful: Funders pay only when innovators successfully deliver the innovative product to customers. This ensures funders only spend money on innovations that meet their target product profile and end-user preferences.
Attracting top innovators from an open field: The payment-upon-success model naturally draws the most capable innovators because they bear the risks of development. Only companies with high confidence in their ability to succeed will choose to participate, effectively filtering for the most promising innovators.
Addressing buyer market power: AMCs are especially useful for innovations where the primary buyer (such as governments) might later try to bargain prices to a level that would discourage companies from investing in initial development. By guaranteeing a return, AMCs ensure that companies will still pursue critical innovations.

What can go wrong?

AMCs for technologically distant innovation targets require funders to commit funds years before the technology is developed and payments are made to innovators, which introduces several key challenges:

Program outcome uncertainty: An AMC would never pay out if the technology is not developed. Some funders may have reputational concerns with backing mechanisms that only pay for success, since they need to show progress to stakeholders. Some mechanisms make activity visible on the books, even when they fail to deliver real-world results. Even AMCs that never pay out may still induce innovative activity that is not directly visible to the funder.
Financial inefficiency: If the funder has access to cheaper financing than the innovators, the delayed payments from the funder increase the endeavor’s overall cost because innovators must finance their work at a higher interest rate. This is often the case for government-funded AMCs, given that governments can generally borrow at a rate lower than what is available to companies seeking private capital investment or financial loans.
Pricing the reward: Funders must estimate appropriate incentive payments without the benefit of observing supply and demand market signals. This makes it challenging to determine a subsidy that’s large enough to motivate investment but still ensures value for society.
Navigating funding restrictions: Government agencies often face legal limitations on committing funds in advance, which can complicate the design of an AMC.
Choosing product specifications: Funders must choose a target product profile that is sufficiently clear and in line with market needs. AMCs mitigate some of these concerns by paying based on adoption, but funders can still hard-code a misaligned target product profile. An overly narrow or prescriptive profile can steer innovators toward producing a product that meets the specifications and achieves some consumer adoption, yet misses a higher-value design that consumers would have preferred.

When these challenges may prevent AMC use, programs can combine AMCs with other funding mechanisms that provide funding disbursements before the technology is market-ready, such as [[milestone payments]]. Expert advisory panels, including specialists in the technology, production, and end-use case, can help guide program design and set appropriate subsidy levels. Because AMCs are so rare, contract design experts and economic theorists can help ensure AMC design properly reflects theoretical understanding.

Examples

The effectiveness of AMCs has been demonstrated through the pioneering Pneumococcal Vaccine AMC:

Pneumococcal Vaccine AMC: In 2009, the GAVI Alliance, with support from donors including the Bill & Melinda Gates Foundation and the G8, committed $1.5 billion through the GAVI Pneumococcal AMC to subsidize future purchases of pneumococcal vaccines for low- and middle-income countries. Subsequently, pharmaceutical companies Pfizer, GlaxoSmithKline, and Synflorix developed three new vaccines. Over 150 million children were immunized, saving an estimated 700,000 lives. The vaccine rollout was highly cost-effective, avoiding a disability-adjusted life year at a cost of just $77–88. Notably, the rollout of the pneumococcal vaccines took roughly five years less than the comparable vaccine rollout for rotavirus, which did not involve an AMC.

While textbook AMCs remain rare, the innovative approach has inspired numerous related policies that seek to address market failures in technology development, including:

Operation Warp Speed: The Department of Defense and the Department of Health and Human Services, through the Trump administration’s Operation Warp Speed, used advance purchase agreements to rapidly incentivize multiple pharmaceutical companies to develop COVID-19 vaccines simultaneously by signing contracts with companies to purchase vaccines at a set volume and price in advance of them being developed. While the company-specific approach of advance purchase agreements differs from a traditional AMC, which would remain open to any innovator, Operation Warp Speed demonstrated how guaranteed market demand can accelerate innovation.
Frontier Carbon Removal: Frontier Climate, whose sponsoring members include Stripe, Shopify, McKinsey, and others, announced their commitment to spend $1 billion on carbon removal technologies, acting similarly to an AMC by committing to a market and signaling serious demand. However, due to technological distance, their implementation deviated from a classic AMC by contracting with specific companies, allowing for more tailored approaches to individual companies’ costs and development pathways rather than maintaining a fully open, technology-agnostic approach.

AMCs do not exist in isolation but are part of a broader toolkit for innovation funding. Understanding how AMCs relate to and complement other funding approaches can help policymakers design more effective innovation strategies:

[[Milestone Payments]]: Milestone payments can provide interim support during long development processes, complementing the market-based AMC approach.
[[Prizes]]: Like AMCs, prizes create powerful incentives for solving complex technological challenges. However, unlike AMCs, prizes are not linked to product adoption or market success, and instead reward achievement of a specific technical goal.
[[Output subsidies]]: Like AMCs, output subsidies and tax credits pay out a monetary reward for market adoption, but are generally used for products and services very close to market.
[[Procurement Contracts]]: Similar to AMCs, these agreements commit to purchasing a product if certain specifications are met. However, they often differ by being more company-specific and less focused on creating an open, competitive market for innovation.

Advance Market Commitment

Definition

Why might an AMC be the right funding approach?

What can go wrong?

Examples

Further reading

Definition

Why might an AMC be the right funding approach?

What can go wrong?

Examples

Related funding approaches

Further reading