Government Price Subsidies to Promote Fast Diffusion of a New Consumer Durable

We consider a market in which a single supplier sells a new product characterized by diffusion effects on the demand side. In this setting we analyze the problem whether or not the government should subsidize the diffusion of this innovation. We assume that the government is a Stackelberg leader and decides about the subsidy (price or cost subsidy) before the supplier sets his optimal price. The objective of the government is to choose a subsidy policy such that the number of adopters at the horizon date is maximized. The firm chooses a pricing strategy so as to maximize the present value of profits.