Incorporating price, advertising and distribution in diffusion models of innovation: Some theoretical and empirical results

Abstract On the theoretical side, this paper characterizes qualitatively optimum price, advertising and distribution policies for new products. Repeat sales and possible entry of rivals are disregarded but discounting of future profits streams and a cost learning curve are allowed. After characterizing optimal policies for a general diffusion model, the results pertaining to several models of specific functional form are reported. The results of the theoretical research show that the qualitative structure of optimal pricing policies of earlier univariate diffusion models in the literature remain robust upon the inclusion of other variables for a variety of multivariate models. On the empirical side, alternative diffusion models have been estimated and compared using non-linear procedures. The diffusion data analysed are related to the U.S. cable TV industry. Empirical research findings suggest that, for the considered case study, price affects the coefficient of innovation, advertising affects the diffusion rate, and distribution affects market potential. Based on price, advertising and distribution elasticities derived from the chosen diffusion model, the shapes of the advertising and distribution cost functions are identified.

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