Choice-Based Diffusion Models

Abstract

We incorporate diffusion effects and choice effects in an integrated model to capture simultaneously the diffusion and substitution processes for each successive generation of a durable technology. The choice literature generally ignores demand dynamics and previous multigeneration diffusion models rarely include control variables. The proposed model is a combination of the two approaches. The basic premise of the proposed model states that the replacement of an older product by a newer one is based on the choice behavior of consumers, where consumers choose a product to maximize their utility. Then we can derive the implied relationships among choice probabilities, diffusion processes, and marketing mix variables. To verify the proposed model, we also analyze the IBM mainframe market and worldwide DRAM (dynamic random access memory) market.