Two faces of word-of-mouth: Understanding the impact of social interactions on demand curves for innovative products

Katarzyna Maciejowska (), Arkadiusz Jędrzejewski, Anna Kowalska-Pyzalska, Katarzyna Sznajd-Weron and Rafał Weron

No HSC/15/09, HSC Research Reports from Hugo Steinhaus Center, Wroclaw University of Science and Technology

Abstract: Word-of-mouth (WOM) is a puzzling phenomenon. It 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. In this paper, we build an agent-based model of innovation diffusion, which links the opinions of potential consumers with their market behavior via the concept of reservation prices. We show that when reversibility of opinions is allowed, WOM may have either a positive or a negative effect on the adoption process, depending on the model parameters and the level of market prices. Our results suggest 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 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 (semi-)analytical 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 Q48 Q55 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2015-10-04
New Economics Papers: this item is included in nep-cmp, nep-com, nep-ino and nep-mkt
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http://www.im.pwr.wroc.pl/~hugo/RePEc/wuu/wpaper/HSC_15_09.pdf Original version, 2015 (application/pdf)

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