We extend a recently developed agent-based model of innovation diffusion by linking the opinions of potential consumers with their market behavior via the concept of reservation prices. Through a dynamic mechanism that takes into account social influence, the agents in our model can both increase or decrease their product appraisal. Considering complete graph network structures and using mean-field treatment we find that the model can exhibit a plethora of scenarios, observed empirically but not attainable within the classical Bass model. We also show the existence of a critical market price above which the innovation cannot diffuse.
Empirical studies suggest that word-of-mouth strongly influences the innovation diffusion process and is responsible for the "S" shape of the adoption curve. However, it is not clear how word-of-mouth 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 word-of-mouth 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 word-of-mouth may have ambiguous consequences and should be taken into account when designing marketing strategies.
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