Innovations: Demand Side

Bass Diffusion Model

 Describes the first purchase and diffusion of innovative new

durables.
 Postulates two distinct types of influences on potential
consumers
 The intrinsic desire to adopt an innovation: the innovation effect.
» Consumer characteristics.
» Marketing-mix activities.

 The influence of social interactions (e.g., through word-of-mouth

WOM) with consumers who have already bought: the imitation
effect.
 The Model

 Let the potential market for a new innovation such as

HDTV be Q and the number of consumers who have
already bought the product at any time t be qt.
 At any time t and for any given consumer in the
population, let the probability of purchase be:

P  i  c qt
 When qt consumers have already bought the product,
then (Q - qt) have not yet purchased (i.e., this is the
untapped market).
 The Model

 The expected sales at any time t are

St  P (Q  qt )  i (Q  qt )  cqt (Q  qt )

 In this i is the coefficient of innovation:

» people who are not affected by how many others have adopted.
» This effect is highest in the initial periods.
» Captures the fact that early buyers are less affected by word-of-mouth
(i.e., WOM).

 c/Q measures the coefficient of imitation.

» This effect increases with the number of people who have already
adopted.
» Later buyers are more influenced by WOM.
 Sales Patterns
Case 1: Innovation with strong innovation but weak
imitation effect (i >> c/Q)
3000000

2500000

2000000

1500000

1000000

500000

0
0

Case 2: Innovation with weak innovation but strong

imitation effect (c/Q >> i)
3000000

2500000

2000000

1500000

1000000

500000

0
0
 Summary

 The original model fits data quite well at the category level in
numerous new product markets.
 Given initial sales data it is a good tool to estimate
» total market potential
» peak of the innovation

 Although it does not include marketing-mix variables, it can be

used to provide input to marketers:
» How to turn a case 1 situation to case 2.

 Ignores the strategic effect of firm competition in shaping the

product diffusion of innovations.
 The Product Lifecycle

Sales and
Profits ($)
Sales

Profits

Time
Product Introduction Growth Maturity Decline
Development
Stage
Losses/
Investments ($)
 What Happens At Decline?

 Four Strategies: The case of Nylon

 Original Uses
» Military parachutes, Ropes, Circular Knit conventional hosiery.
 Usage Frequency
» Hosiery: Pantyhose as a “social necessity.”
 Varied Usage
» Fashion Smartness and Variety
» Tinted Hosiery, Patterned Hosiery
 New Uses
» Rugs and tire cords
 Innovations in Technology Markets

 Windows vs. Apple

 VHS vs. Beta Formats
 QWERTY vs. DVORAK

 Does the superior technology have greater market

share?

 Why?

 Network Externality
 Network Externalities and Innovations

Demand side problems

 Suppose two competing technologies are launched.
» One is established incumbent, there is a new technology.
» existing consumers of the old technology (installed base)
» new consumers who arrive over time.

 Consumers have to anticipate which technology will be widely used by the

competitors.
 Leads to problems
» excess inertia (users wait to adopt ).
» excess momentum (consumers rush to an inferior technology in the fear
of getting stranded).
 How do you solve these problems?

1
 Possible Solutions

Inertia
» communication between users (WOM)
» time bound discounts to early users
» offering converters
» “targeting” the flow of new users. These users exert an externality on
the old technology users.

Excess momentum
» preannouncing the new product to make consumers who are just
about to buy wait. (Windows 95)
» Introduce earlier regardless of some “bugs” but offer quality upgrades
and high quality after sales support (Apple Newton, Pentium)

1
 Supply-Side Problems

 Two firms with incompatible products but which are

substitutes
» Lotus vs. Excel.

 Consumer market has network effect.

 Will any firm want to be compatible?

» Which firm will initiate compatibility?
» What kind of situations will make firms cooperate to be
compatible?
» How should compatibility be achieved?

1
 Possible Answers

 Smaller firm often has the greater incentive to be

compatible.

 The threat of new entry

 More equal market shares implies greater

cooperation