Impact of social interactions on demand curves for innovative products

Katarzyna Maciejowska (katarzyna.maciejowska@pwr.wroc.pl), Arkadiusz Jędrzejewski, Anna Kowalska-Pyzalska and Rafał Weron

No HSC/16/04, HSC Research Reports from Hugo Steinhaus Center, Wroclaw University of Science and Technology

Abstract: Empirical studies suggest that word-of-mouth (WOM) strongly influences the innovation diffusion process and is responsible for the 'S' shape of the adoption curve. However, it is not clear how WOM affects demand curves for innovative products and strategic decisions of producers. Using an agent-based model of innovation diffusion, which links consumer opinions with reservation prices, we show that a relatively strong WOM effect can lead to the creation of two separated price-quantity regimes, with a nonlinear transition between them. A small shift of the product's market price can result in a drastic change of the demanded quantity and, hence, the revenues of a firm. Using Monte Carlo simulations and mean-field treatment we demonstrate that WOM may have ambiguous consequences and should be taken into account when designing marketing strategies.

Keywords: Word-of-mouth; Innovation diffusion; Agent-based model; Demand curve; Marketing strategy (search for similar items in EconPapers)
JEL-codes: C63 O33 Q55 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2016-03-10
New Economics Papers: this item is included in nep-cmp, nep-ino, nep-mkt and nep-soc
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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