A Diffusion Model Incorporating Product Benefits, Price, Income and Information

We start by assuming that a major benefit of many new durable products such as dishwashers and microwave ovens is time savings. Others, such as VCRs, also enhance the value of our leisure time. Using a household production framework we demonstrate that a utility maximizing individual will have a reservation price for the product which is a function of the product benefits and his wage rate. By assuming that the wage rate has an extreme value distribution across the population, we are able to derive, for the aggregate process, an income-price dependent logistic adoption equation. We then allow for the possibility that certain eligible consumers may delay their purchase of the product because they are unaware that it exists, are suspicious of its quality, or expect its price to fall. Unawareness, uncertainty and hope for further price declines are assumed to decrease with the increase in the number of previous adopters. The resulting diffusion model has the property that the product life cycle phenomenon can be explained jointly or separately by the income-price process, and the awareness-uncertainty-expectations process. Using data on household income, on durable penetration within different income classes, and on first-purchase sales the aggregate diffusion model and its premises are tested and supported. It is found that both the income-price and awareness-uncertainty-expectations processes are at work. However, the dependence of the awareness-uncertainty-expectations delay process on the number of previous adopters (e.g., word-of-mouth type effect) exists only in certain product categories and is usually relatively weak. It is demonstrated that if the word-of-mouth type effects are weak, a price skimming strategy is optimal for a monopolist and also is likely to be implemented by oligopolists. The sales forecasting implications of the model also are pursued.