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Quality Risk Aversion, Conjectures, and New Product Diffusion

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Author Info
Francesco Bogliacino
Giorgio Rampa

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Abstract

In this paper we provide a generalization of the standard models of the diffusion of a new product. Consumers are heterogeneous and risk averse, and the firm is uncertain about the demand curve: both learn from past observations. The attitude towards risk has important effects with regard to the diffusion pattern. In our model, downward-biased signals to consumers can prevent the success of the product, even if its objective quality is high: a “lock-in” result. We show in addition that the standard logistic pattern can be derived from the model. Finally, we discuss the asymptotic behavior of the learning dynamics, with regard to the multiplicity and the stability of equilibria, and to their welfare properties.

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Paper provided by Economics and Econometrics Research Institute (EERI) in its series EERI Research Paper Series with number EERI_RP_2009_27.

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Date of creation: 09 2009
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Handle: RePEc:eei:rpaper:eeri_rp_2009_27

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Related research
Keywords: Heterogeneity; Multiple equilibria; Lock-in; Product diffusion; Risk aversion.;

Find related papers by JEL classification:
L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
O33 - Economic Development, Technological Change, and Growth - - Technological Change - - - Technological Change: Choices and Consequences; Diffusion Processes

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. H. Peyton Young, 2007. "Innovation Diffusion in Heterogeneous Populations," Economics Series Working Papers 303, University of Oxford, Department of Economics. [Downloadable!]
  2. Verbrugge, Randal, 2000. "Risk aversion, learning spillovers, and path-dependent economic growth," Economics Letters, Elsevier, vol. 68(2), pages 197-202, August. [Downloadable!] (restricted)
  3. Aoki, Masanao & Yoshikawa, Hiroshi, 2002. "Demand saturation-creation and economic growth," Journal of Economic Behavior & Organization, Elsevier, vol. 48(2), pages 127-154, June. [Downloadable!] (restricted)
  4. Banerjee, Abhijit & Fudenberg, Drew, 2004. "Word-of-mouth learning," Games and Economic Behavior, Elsevier, vol. 46(1), pages 1-22, January. [Downloadable!] (restricted)
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  5. Tsur, Yacov & Sternberg, Menachem & Hochman, Eithan, 1990. "Dynamic Modelling of Innovation Process Adoption with Risk Aversion and Learning," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 336-55, April. [Downloadable!] (restricted)
  6. Matthew O. Jackson & Leeat Yariv, 2007. "Diffusion of Behavior and Equilibrium Properties in Network Games," American Economic Review, American Economic Association, vol. 97(2), pages 92-98, May. [Downloadable!]
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  7. Rothschild, Michael, 1974. "A two-armed bandit theory of market pricing," Journal of Economic Theory, Elsevier, vol. 9(2), pages 185-202, October. [Downloadable!] (restricted)
  8. Jensen, Richard, 1982. "Adoption and diffusion of an innovation of uncertain profitability," Journal of Economic Theory, Elsevier, vol. 27(1), pages 182-193, June. [Downloadable!] (restricted)
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This page was last updated on 2009-12-2.

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