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Subsidy or tax policy for new technology adoption in duopoly with quadratic and linear cost functions

Hattori, Masahiko and Tanaka, Yasuhito (2015): Subsidy or tax policy for new technology adoption in duopoly with quadratic and linear cost functions. Published in: Economics Bulletin

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Abstract

We present an analysis about subsidy (or tax) policy for adoption of new technology in a duopoly with a homogeneous good. Technology itself is free. However, firms must expend fixed set-up costs for adoption of new technology, for example, education costs of their staffs. We assume linear demand function, and consider two types of cost functions of firms. Quadratic cost functions and linear cost functions. There are various cases of optimal policies depending on the level of the set-up cost and the forms of cost functions. In particular, under linear cost functions there is the following case.

The social welfare is maximized when one firm adopts new technology, however, both firms adopt new technology without subsidy nor tax. Then, the government should impose taxes on one firm or both firms.

Under quadratic cost functions there exists no taxation case. There are subsidization cases both under quadratic and linear cost functions.

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