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Optimal Price Subsidy Policy for Accelerating the Diffusion Of Innovation

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Author Info

  • 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)

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    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.

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    File URL: http://dx.doi.org/10.1287/mksc.2.4.407
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    Bibliographic Info

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 2 (1983)
    Issue (Month): 4 ()
    Pages: 407-420

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    Handle: RePEc:inm:ormksc:v:2:y:1983:i:4:p:407-420

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    Related research

    Keywords: price subsidy; diffusion of innovations;

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    Cited by:
    1. 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.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    7. 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.
    8. Tomasz Kijek & Arkadiusz Kijek, 2010. "Modelling of innovation diffusion," Operations Research and Decisions, Wroclaw University of Technology, Institute of Organization and Management, vol. 3, pages 53-68.

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