The role of marketing variables in diffusion

The role of marketing mix variables such as price and advertising on a new product’s diffusion has been extensively studied. Although the Bass model fits reasonably well without marketing decision variables (Bass, Krishnan, and Jain, 1994), by explicitly incorporating marketing mix variables, many studies have been able to come up with useful managerial insights and guidelines. Horsky (1990) uses a variant of the Bass model to study the diffusion of consumer durables as a function of consumer income, price, and information.

He finds that utility maximizing individuals have a reservation price for a durable, which is a function of the product benefits and the individual’s wage rate. In his model, the income-price process and the awareness-uncertainty-expectations process can jointly or separately explain the PLC phenomenon. However, the dependence on the awareness-uncertainty-expectations delay process is only present in certain product categories and is relatively weak.

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Horsky suggests that if word of mouth effects are weak, a price skimming strategy is optimal for a monopolist and is likely to be implemented by oligopolists as well. Kalish (1985) offers optimal pricing and advertising paths for a new durable monopoly based on a two-stage diffusion model of awareness and adoption. He shows that under certain conditions, the optimal price and advertising are monotonically decreasing over time.

Narasimhan (1989) uses game theory to examine the sensitivity of the optimal price path of a new durable product to the price expectations of consumers. He finds that in the absence of expectations and diffusion, price will decline monotonically due to heterogeneity in reservation prices; in the presence of expectations and no diffusion, price can still decline over time except that the expectations impose restrictions on how fast prices can decline;

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if there is no expectation, and if consumers enter the market according to diffusion process, we know from prior research that the price initially will be low, will increase, and then will fall off unless the diffusion effect is very small; in the presence of expectations, and if consumers enter the market according to diffusion process, prices cycle up and down. The impact of consumer expectations on the price path is to place restrictions on how fast a monopolist can reduce its price to clear the market periodically of consumers with low reservation price.

The price path will decline monotonically from period one and there will be no cycling if consumers who place a high valuation on the product enter first and only then do all consumers enter who place lower valuation on the product. Jain and Rao (1990) propose a modified Bass model that incorporates the effect of price and estimate it on four consumer durable products.

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They find that price influences consumers’ decisions on whether or not to buy and that the diffusion process governs the timing of purchase given the decision to buy. They also find that the estimated coefficient of imitation in the Bass model is understated if price is inappropriately modeled. 68 VENKATESH SHANKAR Horsky and Simon (1983) examine the effects of a

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