Escaping excess inertia by the adoption of transitional technology

Abstract

We build the network effect model treats the context in which the environmentally clean technology cannot be adopted by consumers due to excess inertia because of incompatibility to the installed complementary infrastructure of the incumbent dirty technology, and analyze the optimal subsidy policy of government on the adoption of a transitional technology to induce the entrant clean technology ultimately until the clean technology escapes from excess inertia. We introduce two extreme Nash equilibria in which the consumers expect the consistency of government electric vehicle policy or not, considering the choices of future consumers, and we also show different decision dynamics for each equilibrium in the model. We prove that if the government intervenes to the market, every consumer believes the consistency of the policy and expects that every future consumer also joins to the entrant technology network in unique subgame-perfect Nash equilibrium. With the subgame-perfect Nash equilibrium, we discuss the warranty of government intervention and optimal choice of the government on the amount of subsidy and duration of transitional technology adoption, considering the net present value life time utility of consumers and environmental damage. Finally, we highlight the role of the transitional technology in excess inertia context.