INCORPORATING PRICE AND REPLACEMENT PURCHASES IN NEW PRODUCT DIFFUSION-MODELS FOR CONSUMER DURABLES

The article presents theoretical and empirical research findings which incorporate price and replacement purchases in new product diffusion models. On the theoretical side, this paper characterizes, qualitative ly, optimum pricing policies for new products. Possible entry of rival s is not considered, but repeat sales, cost learning dynamics and disc ounting of future profit streams are allowed. Theoretical research fin dings suggest that the inclusion of repeat purchases in the diffusion model significantly changes the derived optimal pricing policy even if replacements were not price dependent. On the empirical side, alterna tive first purchase and repeat purchase models have been estimated and compared using nonlinear procedures. The diffusion data analyzed is r elated to nine consumer durables. Empirical research findings suggest that, for the considered product categories, diffusion is basically an imitative process, price can affect first and replacement purchases, and unit production cost is a decreasing function of cumulative first purchases. Managerial implications of the research findings are also d iscussed.