Price subsidies and guaranteed buys of a new technology

Abstract We consider a problem of a government that wishes to stimulate the adoption of a new technology in order to replace an older, environmentally less desirable, technology. The new technology is manufactured by a monopolist firm which has learning-by-doing in its production process. The firm sells the new product to both private households and government institutions and wishes to determine an optimal pricing policy. The government has at its disposal two instruments: subsidizing the consumer price and making purchases of the new technology from the firm. We assume profit maximization on the part of the firm. The government wishes to maximize the cumulative number of units of the new technology sold to private households by the terminal date of the government program. The problem is set up as a Stackelberg differential game in which we identify an open-loop equilibrium, supposing that the government can credibly precommit to its subsidy and buying program.