A Micromodel of New Product Adoption with Heterogeneous and Forward-Looking Consumers: Application to the Digital Camera Category

We develop an empirical model for the adoption process of a new durable product that accounts for consumer heterogeneity as well as consumers” forward-looking behavior. Accounting for heterogeneity is important for two reasons. As the mix of consumers with different preferences and price sensitivities could change over time, firms need to update their marketing strategies. Further, it allows for a variety of shapes for the aggregate adoption process over time. As prices for durable and technology products fall over time with firms continually introducing enhanced products, consumers may anticipate these prices and improvements and delay their purchases in the product category. Forward-looking consumers optimize purchase timing by trading off their utilities from buying the product and their expectations on future prices, quality levels, and brand availability. Such forward-looking behavior will result in price dynamics in the marketplace as price changes today influence future purchases. And it results in different shapes of the new product sales pattern over time by influencing the time to take-off. We show how the parameters of our model can be estimated using aggregate data on the sales, prices, and attributes of brands in a product category. We apply our model to market data from the digital camera category. Our data are consistent with the presence of both heterogeneity and forward looking behavior among consumers. At the product category level, we are able to decompose the effects of the entry of Sony into primary demand expansion and switching from other brands. At the brand level, we find that there exist several segments in the market with different preferences for the brands and different price sensitivities leading to differences in adoption timing and brand choice across segments. For a given brand, we show how the changing customer mix over time has implications for that brand”s pricing strategies. We characterize how price effects vary across brands and over time and how price changes in a given time period influence sales in subsequent periods. Model comparison and validation results are also provided.

[1]  Jacob Goldenberg,et al.  Riding the Saddle: How Cross-Market Communications Can Create a Major Slump in Sales , 2002 .

[2]  John Rust.  Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher , 1987 .

[3]  Barry L. Bayus,et al.  The Market Evolution and Sales Takeoff of Product Innovations , 2002, Manag. Sci..

[4]  Gary J. Russell,et al.  A Probabilistic Choice Model for Market Segmentation and Elasticity Structure , 1989 .

[5]  G. Urban,et al.  You have printed the following article : Modeling Multiattribute Utility , Risk , and Belief Dynamics for New Consumer Durable Brand Choice , 2007 .

[6]  M. Keane,et al.  Decision-Making Under Uncertainty: Capturing Dynamic Brand Choice Processes in Turbulent Consumer Goods Markets , 1996 .

[7]  V. Srinivasan,et al.  The Asymmetric Share Effect: An Empirical Generalization on Cross-Price Effects , 2002 .

[8]  D. Horsky.  A Diffusion Model Incorporating Product Benefits, Price, Income and Information , 1990 .

[9]  Steven T. Berry,et al.  Automobile Prices in Market Equilibrium , 1995 .

[10]  Rajiv K. Sinha,et al.  A Split Hazard Model for Analyzing the Diffusion of Innovations , 1992 .

[11]  Frank M. Bass,et al.  Impact of a Late Entrant on the Diffusion of a New Product/Service , 2000 .

[12]  Dipak C. Jain,et al.  Why the Bass Model Fits without Decision Variables , 1994 .

[13]  Rabikar Chatterjee,et al.  The Innovation Diffusion Process in a Heterogeneous Population: A Micromodeling Approach , 1990 .

[14]  Russell S. Winer,et al.  Technical Note---A Price Vector Model of Demand for Consumer Durables: Preliminary Developments , 1985 .

[15]  G. Tellis,et al.  Will It Ever Fly? Modeling the Takeoff of Really New Consumer Durables , 1997 .

[16]  V. Srinivasan,et al.  Asymmetric and Neighborhood Cross-Price Effects: Some Empirical Generalizations , 1999 .

[17]  Kannan Srinivasan,et al.  Estimating the Impact of Consumer Expectations of Coupons on Purchase Behavior: A Dynamic Structural Model , 1996 .

[18]  Trichy V. Krishnan,et al.  Optimal Pricing Strategy for New Products , 1999 .

[19]  V. Rao,et al.  A micro-analytic threshold model for the timing of first purchases of durable goods , 1998 .

[20]  Richard A. Briesch,et al.  A High-Tech Product Market Share Model with Customer Expectations , 1995 .

[21]  Shmuel S. Oren,et al.  Diffusion of new products in risk-sensitive markets , 1988 .

[22]  F. Bass.  A new product growth model for consumer durables , 1976 .

[23]  B. Bayus.  The Dynamic Pricing of Next Generation Consumer Durables , 1992 .

[24]  Vijay Mahajan,et al.  New Product Diffusion Models in Marketing: A Review and Directions for Research: , 1990 .

[25]  John Rust.  Structural estimation of markov decision processes , 1986 .

[26]  C. Narasimhan.  Incorporating Consumer Price Expectations in Diffusion Models , 1989 .