Optimal Price Subsidy Policy for Accelerating the Diffusion Of Innovation

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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. (Price Subsidy; Diffusion of Innovations) Kotler (1982, p. 490) defines social marketing as "the design, implementa- tion and control of programs seeking to increase the acceptability of a social idea or a cause." Although frequently referred to as "idea marketing," the concept can be readily applied to any attempt to effect desirable, social behavior. This paper views the development of a Federal price subsidy policy for a new technology as an application of social marketing concepts. The purpose of the paper is to determine what general structure such a policy should take to be most cost-effective. We proceed as follows: the next section introduces the problem the govern- ment faces in supporting and trying to promote new technologies, alternative

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