Quality Risk Aversion, Conjectures, and New Product Diffusion

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 steady states of the learning dynamics, with regard to the multipliciTY and the local stabiliTY of equilibria, and to their welfare properties. Copyright Springer-Verlag 2012

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