The Sales Effect of Word of Mouth: A Model for Creative Goods and Estimates for Novels
Ludwig Maximilian University of Munich - Faculty of Business Administration (Munich School of Management)
WZB Markets and Politics Working Paper No. SP II 2006-16
Weekly sales of creative goods - like music records, movies or books - usually peak shortly after release and then decline quickly. In many cases, however, they follow a hump-shaped pattern where sales increase for some time. A popular explanation for this phenomenon is word of mouth among a population of heterogeneous buyers, but previous studies typically assume buyer homogeneity or neglect word of mouth altogether. In this paper, I study a model of new-product diffusion with heterogeneous buyers that allows for a quantification of the sales effect of word of mouth. The model includes Christmas sales as a special case. All parameters have an intuitive interpretation. Simulation results suggest that the parameters are estimable for data that are not too volatile and that cover a sufficiently large part of a title's life cycle. I estimate the model for four exemplary novels using scanner data on weekly sales.
Number of Pages in PDF File: 36
Keywords: new-product diffusion, word of mouth, creative industries
JEL Classification: C22, L82, M3
Date posted: October 11, 2006