Monopolist optimum pricing and advertising policies for diffusion models of new product innovations

Abstract

On the theoretical side, this paper contains a general diffusion model of innovation that includes previous models in the literature as special cases. Optimal price and advertising are characterized qualitatively for the general model and several specific cases. Cost learning effects and discounting of future profits are considered, but repeat sales and likely entry of competitors are disregarded. On the empirical side, eighteen alternative diffusion models for a newly introduced innovation have been estimated and compared using non-linear procedures. Empirical research findings suggest that for the considered case study, price affects the coefficient of imitation whereas advertising affects the coefficient of innovation. Price (advertising) elasticity of demand is found to be increasing (decreasing) over time.

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