Groupe d’études et de recherche en analyse des décisions

G-92-23

A Differential Game Model for Optimal Price Subsidy of New Technologies

We consider a differential game model to investigate the effects of price subsidy over time on the rate of diffusion of a new technology. We assume that the latter is produced by a monopolist whose objective is to maximize his profit stream over the planning horizon [0,T]. The government seeks to maximize the total number of installations by time T. The motivation of the government's behaviour is the existence of a net societal benefit in accelerating the diffusion of the new technology. The assumption of a monopolistic market structure stems from patent protection, for instance. The firm controls the price and the government the subsidy rate. It is shown that the timepaths of demand, subsidy, government spending rate and price depend on some product characteristics and cost structure.

, 22 pages