Diffusion of new products in risk-sensitive markets

Diffusion of new products may be deterred by consumers’ uncertainties about how they will perform. This paper introduces a decision-theoretic framework for modeling the diffusion of consumables, in which consumers choose between a current and new product so as to maximize expected utility. Consumers that are sufficiently risk-averse delay adoption, and change their prior uncertainties in a Bayesian fashion using information generated by early adopters. Under certain assumptions about the underlying consumer choice process and the market dynamics, the result is logistic growth in the share of consumers that choose the new product. The model can be generalized by allowing for consumer heterogeneity with respect to performance of the new product. The paper concludes with a discussion of applications for market forecasting, design of market trials and other extensions.