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A New Product Adoption Model with Price, Advertising, and Uncertainty

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  • Shlomo Kalish

    (Recanati Graduate School of Business Administration, Tel Aviv University, Tel Aviv, Israel and Graduate School of Management, University of Rochester, Rochester, New York 14627)

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    Abstract

    This paper introduces a framework for modeling innovation diffusion that includes price and advertising. The adoption of a new product is characterized by two steps: awareness and adoption. Awareness is the stage of being informed about the product search attributes. The process of becoming aware is modeled as a simple "epidemic" type model, where the information is spread by advertising and word of mouth. The second step, adoption, is conditional on awareness, and it occurs if the perceived risk adjusted value of the product exceeds its selling price. The population is heterogeneous with respect to valuation of the product. Individuals are risk averse, and therefore are willing to pay more for the product, on the average, as information from early adopters reduces uncertainty about the product. Optimal control of the diffusion process by pricing and advertising over time is analyzed, and a comparative estimation of the model in one application is reported.

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    File URL: http://dx.doi.org/10.1287/mnsc.31.12.1569
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 31 (1985)
    Issue (Month): 12 (December)
    Pages: 1569-1585

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    Handle: RePEc:inm:ormnsc:v:31:y:1985:i:12:p:1569-1585

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    Related research

    Keywords: marketing; new products; diffusion of innovation;

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    Cited by:
    1. Catherine Tucker, 2011. "Network Stability, Network Externalities and Technology Adoption," NBER Working Papers 17246, National Bureau of Economic Research, Inc.
    2. Hernández-Mireles, C. & Fok, D. & Franses, Ph.H.B.F., 2008. "The Triggers, Timing and Speed of New Product Price Landings," ERIM Report Series Research in Management ERS-2008-044-MKT, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
    3. Chih-Jou Chen & Chia-Chin Chang & Shiu-Wan Hung, 2011. "Influences of Technological Attributes and Environmental Factors on Technology Commercialization," Journal of Business Ethics, Springer, vol. 104(4), pages 525-535, December.
    4. Ouardighi, Fouad El & Tapiero, Charles S., 1998. "Quality and the diffusion of innovations," European Journal of Operational Research, Elsevier, vol. 106(1), pages 31-38, April.
    5. Yan, Xiaoming & Liu, Ke, 2009. "Optimal control problems for a new product with word-of-mouth," International Journal of Production Economics, Elsevier, vol. 119(2), pages 402-414, June.
    6. Huang, Jian & Leng, Mingming & Liang, Liping, 2012. "Recent developments in dynamic advertising research," European Journal of Operational Research, Elsevier, vol. 220(3), pages 591-609.
    7. Vardan Avagyan & Mercedes Esteban Bravo & Jose Vidal-Sanz, 2011. "Licensing radical product innovations to speed up the diffusion," Business Economics Working Papers wb113609, Universidad Carlos III, Departamento de Economía de la Empresa.
    8. Meade, Nigel & Islam, Towhidul, 2006. "Modelling and forecasting the diffusion of innovation - A 25-year review," International Journal of Forecasting, Elsevier, vol. 22(3), pages 519-545.
    9. Alexei Parakhonyak & Nick Vikander, 2013. "Optimal Sales Schemes for Network Goods," Discussion Papers 13-11, University of Copenhagen. Department of Economics.
    10. Mesak, Hani I. & Bari, Abdullahel & Babin, Barry J. & Birou, Laura M. & Jurkus, Anthony, 2011. "Optimum advertising policy over time for subscriber service innovations in the presence of service cost learning and customers' disadoption," European Journal of Operational Research, Elsevier, vol. 211(3), pages 642-649, June.
    11. Wilhelm, Wilbert E. & Xu, Kaihong, 2002. "Prescribing product upgrades, prices and production levels over time in a stochastic environment," European Journal of Operational Research, Elsevier, vol. 138(3), pages 601-621, May.
    12. Martin Hewing, 2012. "A Theoretical and Empirical Comparison of Innovation Diffusion Models Applying Data from the Software Industry," Journal of the Knowledge Economy, Springer, vol. 3(2), pages 125-141, June.
    13. Urban, Glen L. & Roberts, John H. & Hauser, John R., 1986. "Prelaunch forecasting of new automobiles : models and implementation," Working papers 1820-86., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    14. Teng, Jinn-Tsair & Thompson, Gerald L., 1996. "Optimal strategies for general price-quality decision models of new products with learning production costs," European Journal of Operational Research, Elsevier, vol. 93(3), pages 476-489, September.
    15. Amit Mehra & Gireesh Shrimali, 2008. "Introduction of Software Products and Services Through "Public" Beta Launches," Working Papers 08-11, NET Institute.

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