Group for Research in Decision Analysis


Price Subsidies and Guaranteed Buys of a New Technology


A government wishes to accelerate the adoption of a new technology in order to gradually replace an older one. The new technology is manufactured by a monopolist firm which has learning-by-doing in its production. The firm sells its product to both private households and government institutions. For the latter, a mark-up pricing rule is adopted. The government has at its disposal two instruments: subsidizing the consumer price and guaranteed buys from the firm. We assume profit maximization on the part of the firm whereas government wishes to maximize the number of units adopted by households at the terminal date of the government program. The problem is set up as a differential game in which we identify an open-loop Stackelberg equilibrium, under the assumption that government precommits to its program.

, 27 pages