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A diffusion model for products with indirect network externalities

  • Sung Yong Chun

    (Kookmin Bank, Seoul, Korea)

  • Minhi Hahn

    (Graduate School of Management, Korea Advanced Institute of Science and Technology, Seoul, Korea)

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    This paper develops a new diffusion model that incorporates the indirect network externality. The market with indirect network externalities is characterized by two-way interactive effects between hardware and software products on their demands. Our model incorporates two-way interactions in forecasting the diffusion of hardware products based on a simple but realistic assumption. The new model is parsimonious, easy to estimate, and does not require more data points than the Bass diffusion model. The new diffusion model was applied to forecast sales of DVD players in the United States and in South Korea, and to the sales of Digital TV sets in Australia. When compared to the Bass and NSRL diffusion models, the new model showed better performance in forecasting long-term sales. Copyright © 2008 John Wiley & Sons, Ltd.

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    File URL: http://hdl.handle.net/10.1002/for.1058
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    Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

    Volume (Year): 27 (2008)
    Issue (Month): 4 ()
    Pages: 357-370

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    Handle: RePEc:jof:jforec:v:27:y:2008:i:4:p:357-370
    DOI: 10.1002/for.1058
    Contact details of provider: Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966

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    1. V. Srinivasan & Charlotte H. Mason, 1986. "Technical Note—Nonlinear Least Squares Estimation of New Product Diffusion Models," Marketing Science, INFORMS, vol. 5(2), pages 169-178.
    2. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
    3. John A. Norton & Frank M. Bass, 1987. "A Diffusion Theory Model of Adoption and Substitution for Successive Generations of High-Technology Products," Management Science, INFORMS, vol. 33(9), pages 1069-1086, September.
    4. Nicholas Economides, 1997. "The Economics of Networks," Brazilian Electronic Journal of Economics, Department of Economics, Universidade Federal de Pernambuco, vol. 1(0), December.
    5. David C. Schmittlein & Vijay Mahajan, 1982. "Maximum Likelihood Estimation for an Innovation Diffusion Model of New Product Acceptance," Marketing Science, INFORMS, vol. 1(1), pages 57-78.
    6. Sachin Gupta & Dipak C. Jain & Mohanbir S. Sawhney, 1999. "Modeling the Evolution of Markets with Indirect Network Externalities: An Application to Digital Television," Marketing Science, INFORMS, vol. 18(3), pages 396-416.
    7. Church, J. & Gandal, N., 1991. "Complementary Network Externalities and Technological Adoption," Papers 5-91, Tel Aviv.
    8. Frank M. Bass, 1969. "A New Product Growth for Model Consumer Durables," Management Science, INFORMS, vol. 15(5), pages 215-227, January.
    9. Joseph Farrell & Garth Saloner, 1984. "Standardization, Compatibility and Innovation," Working papers 345, Massachusetts Institute of Technology (MIT), Department of Economics.
    10. Frank M. Bass & Trichy V. Krishnan & Dipak C. Jain, 1994. "Why the Bass Model Fits without Decision Variables," Marketing Science, INFORMS, vol. 13(3), pages 203-223.
    11. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-41, August.
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