Quality Risk Aversion, Conjectures, and New Product Diffusion

Abstract

In this paper we provide a generalization of the standard models of the diffusion of a new product. Consumers are heterogeneous and risk averse, and the firm is uncertain about the demand curve: both learn from past observations. The attitude towards risk has important effects with regard to the diffusion pattern.

In our model, downward-biased signals to consumers can prevent the success of the product, even if its objective quality is high: a lock-in result. We show in addition that the standard logistic pattern can be derived from the model. Finally, we discuss the asymptotic behavior of the learning dynamics, with regard to the multiplicity and the stability of equilibria, and to their welfare properties.

Keywords: Heterogeneity, Multiple equilibria, Lock-in, Product diffusion, Risk Aversion

JEL Classification: L15, D81, O33