Technology Policy
Supply Side

One of the aims of government policy has been to accelerate the diffusion of new technologies. This aim has been pursued largely through policies designed to improve the availability of information about the new technology, or through subsidies for the purchase of the technology. On what basis should government choose between these policies? In order to answer this question we need to understand the influences on diffusion of new technologies.

Why should a new technology not be adopted instantaneously, by all firms in an industry? Economists have concentrated on two explanations of the rate at which new technology spreads. The first stresses the information available to potential users: the new technology is not adopted immediately because users do not know of its existence or its characteristics. Diffusion thus reflects learning by potential purchasers. The second explanation focusses on the differences between potential users which affect the benefits they will obtain from the new technology and the price they are willing to pay for it.

Both these approaches concentrate on the demand for the new technology. In Discussion Paper No. 49, Paul David and CEPR Research Fellow Paul Stoneman argue that the characteristics of the industry supplying the new technology should also be incorporated into analyses of diffusion. They construct models of the diffusion process which incorporate supply considerations as well as users' expectations concerning the future price of technology. Their research explores the impact of technology policies on the rate of diffusion. It was undertaken with financial support from the Technological Innovation Program of the Center for Economic Policy Research at Stanford University.

Stoneman and David argue that the market structure of the industry supplying the new technology is a key determinant of the impact of the policies. They consider the two polar cases of perfect competition and of monopoly in the supplying industry. In the perfectly competitive case a policy of information provision leads to an increase in the number of firms adopting the new technology. The provision of information also increases social welfare. The effects of information provision are uncertain when the industry supplying the technology is monopolistic. The monopolist has an incentive to reduce the price of the technology today, in order to stimulate its adoption in the future; the additional users today spread knowledge of the technology and this will stimulate future demand.A policy of information provision may reduce the monopolist's incentive to reduce his prices; the net effect on the diffusion of the new technology and on social welfare is thus uncertain. Stoneman and David note that the one case where information has been praised - the agricultural extension schemes in the US - may in fact be one of competitive supply.

Governments also subsidise the purchase of new technology, in order to encourage learning and accelerate diffusion. David and Stoneman find that the outcome of this policy is also sensitive to supply conditions. If there is perfect competition in the industry supplying the technology, subsidisation increases the number of firms using the technology both today and in future periods. The effect of subsidisation on social welfare is uncertain, however. If the industry supplying the technology is monopolistic, the policy of subsidisation has more predictable effects. The number of firms using the technology increases, as does social welfare.

David and Stoneman conclude that if the industry supplying the technology is perfectly competitive, information provision may be preferable to subsidisation, while under monopoly the reverse may be the case.


Subsidisation vs Information Provision as Instruments of Technology Policy
P A David and P L Stoneman

Discussion Paper No. 49, February 1985 (ATE)