Subsidizing New Technology Adoption in a Stackelbe

Authors: Masahiko Hattori Yasuhito Tanaka

Publish Date: 2016/03/02

Volume: 2, Issue: 2, Pages: 197-215

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Abstract

Social welfare is maximized when only the Stackelberg leader adopts the new technology but no firm adopts the new technology without a subsidy Then the government should subsidize only the leader which is a discriminatory policy Case 5 of Theorem 1 and Case 31ii of Theorem 2Social welfare is maximized when both firms adopt the new technology but only the leader adopts the new technology without a subsidy Then the government should subsidize only the follower This policy is not discriminatory because adoption is the dominant strategy for the leader Case 2 of Theorem 1Firms’ adoption of new technology is very important for economic growth However it may be insufficient in less competitive industries from the social welfare point of view In this case a government subsidy is necessary We present an analysis of firms’ adoption of new technology and government subsidization policy in a Stackelberg duopoly with differentiated goods The technology itself is free but each firm must expend a fixed setup cost such as training employeesSocial welfare is defined as the sum of consumer surplus and firms’ profits which is equal to consumer utility minus production costs including the new technology setup costs Subsidies are financed by lumpsum taxes on consumers which are not related to the goods produced by firms Excluding income effects these taxes do not affect demand for the goods and are offset by subsidiesSocial welfare is maximized when only the Stackelberg leader adopts the new technology but no firm adopts the new technology without a subsidy Then the government should subsidize only the leader which is a discriminatory policy Case 5 of Theorem 1 and Case 31ii of Theorem 2

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