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Optimal Price Subsidy Policy for Accelerating the Diffusion Of Innovation

Author

Listed:
  • Shlomo Kalish

    (Graduate School of Management, University of Rochester, Rochester, New York 14627)

  • Gary L. Lilien

    (310 Business Administration Building, The Pennsylvania State University, University Park, Pennsylvania 16802)

Abstract

Due to the risk inherent in dependence on foreign oil, there is a social benefit in aiding the introduction of alternative energy sources into the market place. The Federal government has initiated a number of programs, including price subsidies, to help accelerate the market diffusion of new, alternative energy systems. We develop a model to investigate analytically the effects of a price subsidy over time on the rate of market diffusion. The model considers word-of-mouth effects and learning curve cost declines. Under a set of conditions that a new technology should be expected to meet before commercialization, the optimal subsidy level is shown to be nonincreasing in time. The related market price is shown to be closely related to the diffusion effect. If there is no such effect, the price to the customer is constant. If there is positive diffusion effect, price increases in time, while if market saturation causes demand to decline over time price decreases in time.

Suggested Citation

  • Shlomo Kalish & Gary L. Lilien, 1983. "Optimal Price Subsidy Policy for Accelerating the Diffusion Of Innovation," Marketing Science, INFORMS, vol. 2(4), pages 407-420.
    • Handle: RePEc:inm:ormksc:v:2:y:1983:i:4:p:407-420
    DOI: 10.1287/mksc.2.4.407
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    Cited by:

    1. Jorgensen, Steffen & Zaccour, Georges, 1999. "Price subsidies and guaranteed buys of a new technology," European Journal of Operational Research, Elsevier, vol. 114(2), pages 338-345, April.
    2. Arkadiusz Kijek & Tomasz Kijek, 2010. "Modelling of innovation diffusion," Operations Research and Decisions, Wroclaw University of Science and Technology, Faculty of Management, vol. 20(3-4), pages 53-68.
    3. Barnes, Belinda & Southwell, Darren & Bruce, Sarah & Woodhams, Felicity, 2014. "Additionality, common practice and incentive schemes for the uptake of innovations," Technological Forecasting and Social Change, Elsevier, vol. 89(C), pages 43-61.
    4. Sridhar Narayanan & Harikesh S. Nair, 2011. "Estimating Causal Installed-Base Effects: A Bias-Correction Approach," Working Papers 11-22, NET Institute.
    5. Donald Lehmann & Mercedes Esteban-Bravo, 2006. "When giving some away makes sense to jump-start the diffusion process," Marketing Letters, Springer, vol. 17(4), pages 243-254, December.
    6. Avagyan, Vardan & Esteban-Bravo, Mercedes & Vidal-Sanz, Jose M., 2016. "Riding successive product diffusion waves. Building a tsunami via upgrade-rebate programs," International Journal of Research in Marketing, Elsevier, vol. 33(4), pages 780-796.
    7. Luo, Qi & Saigal, Romesh & Chen, Zhibin & Yin, Yafeng, 2019. "Accelerating the adoption of automated vehicles by subsidies: A dynamic games approach," Transportation Research Part B: Methodological, Elsevier, vol. 129(C), pages 226-243.
    8. Demirci, Ece Zeliha & Erkip, Nesim K., 2017. "Designing an intervention strategy for public-interest goods: The California electric vehicle market case," Omega, Elsevier, vol. 69(C), pages 53-69.
    9. Stephen P. Holland & Erin T. Mansur & Andrew J. Yates, 2021. "The Electric Vehicle Transition and the Economics of Banning Gasoline Vehicles," American Economic Journal: Economic Policy, American Economic Association, vol. 13(3), pages 316-344, August.
    10. Saed Alizamir & Francis de Véricourt & Peng Sun, 2016. "Efficient Feed-In-Tariff Policies for Renewable Energy Technologies," Operations Research, INFORMS, vol. 64(1), pages 52-66, February.
    11. Garrett, Vicki & Koontz, Tomas M., 2008. "Breaking the cycle: Producer and consumer perspectives on the non-adoption of passive solar housing in the US," Energy Policy, Elsevier, vol. 36(4), pages 1551-1566, April.
    12. Wu, Chin-Chun & Lin, Pei-Chun & Chou, Chao-Yu, 2006. "Determination of price and warranty length for a normal lifetime distributed product," International Journal of Production Economics, Elsevier, vol. 102(1), pages 95-107, July.
    13. Mainali, Brijesh & Mahapatra, Krushna & Pardalis, Georgios, 2021. "Strategies for deep renovation market of detached houses," Renewable and Sustainable Energy Reviews, Elsevier, vol. 138(C).
    14. Jørgensen, Steffen & Kort, Peter M. & Zaccour, Georges, 2009. "Optimal pricing and advertising policies for an entertainment event," Journal of Economic Dynamics and Control, Elsevier, vol. 33(3), pages 583-596, March.
    15. Jingpei Ma & Xuejun Sun, 2023. "Green technology licensing: Evaluating government subsidies based on different efficiency levels across competitors," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(4), pages 1920-1934, June.
    16. Koray Cosguner & P. B. (Seethu) Seetharaman, 2022. "Dynamic Pricing for New Products Using a Utility-Based Generalization of the Bass Diffusion Model," Management Science, INFORMS, vol. 68(3), pages 1904-1922, March.
    17. Terry A. Taylor & Wenqiang Xiao, 2014. "Subsidizing the Distribution Channel: Donor Funding to Improve the Availability of Malaria Drugs," Management Science, INFORMS, vol. 60(10), pages 2461-2477, October.
    18. Heinz, B. & Graeber, M. & Praktiknjo, A.J., 2013. "The diffusion process of stationary fuel cells in a two-sided market economy," Energy Policy, Elsevier, vol. 61(C), pages 1556-1567.
    19. Hernández-Mireles, C. & Fok, D. & Franses, Ph.H.B.F., 2008. "The Triggers, Timing and Speed of New Product Price Landings," ERIM Report Series Research in Management ERS-2008-044-MKT, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    20. Eryn Juan He & Joel Goh, 2022. "Profit or Growth? Dynamic Order Allocation in a Hybrid Workforce," Management Science, INFORMS, vol. 68(8), pages 5891-5906, August.
    21. Meade, Nigel & Islam, Towhidul, 2006. "Modelling and forecasting the diffusion of innovation - A 25-year review," International Journal of Forecasting, Elsevier, vol. 22(3), pages 519-545.
    22. Lohawala, Nafisa, 2023. "Roadblock or Accelerator? The Effect of Electric Vehicle Subsidy Elimination," RFF Working Paper Series 23-13, Resources for the Future.

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    Keywords

    price subsidy; diffusion of innovations;

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