Empirical analysis of dynamic consumer choice behavior: Micromodeling the new product adoption process with heterogeneous and forward-looking consumers

This study develops an empirical model for the new product adoption process that allows for consumer heterogeneity as well as consumers' forward-looking behavior. Accounting for heterogeneity is important in updating marketing strategies if the mix of customers changes over time. This study provides a way to measure the changes in the mix of customers over time. For high technology products such as digital cameras, consumers may anticipate that prices will keep falling or that quality will increase for the same price. Thus, forward-looking consumers optimize the timing of their purchases based on the trade-off between their utilities from buying the product and their expectations on future prices, quality levels, and brand availability. Such forward-looking behavior will also affect the shape of the new product sales pattern over time.; I assume that each consumer chooses the alternative that gives the highest discounted sum of expected utility. I treat “no purchase” as an alternative that a consumer can choose each period. By choosing this option, the consumer delays purchase. Thus choosing the “no purchase” alternative can be regarded as holding an option that can be exercised in the future. A consumer's choice decision entails comparing the value of choosing a particular product with the value of delaying purchase. As this tradeoff is influenced by consumer specific characteristics such as risk aversion and price sensitivities, different consumers adopt the new product at different points in time.; It is demonstrated how consumer heterogeneity and forward-looking behavior affect the sales pattern of new durable products and how the parameters of the model can be estimated using aggregate data on the sales, prices, and attributes of brands in a product category. I apply my model to market data from two product categories, wireless phone and digital camera, to investigate empirically whether and how consumer expectations and heterogeneity influence the diffusion pattern of product sales. I also provide measures of intertemporal price elasticity, showing that pricing strategy should follow the changes in the mix of customers over time.