Simultaneous estimation of market diffusion and competition for new products

Estimation and prediction of growth in demand for an innovation has been the focus of an entire stream of research in marketing. However, little attention has been paid to the interactive relationship between diffusion of innovations and the entry and exit behaviors of competitors in the marketplace. The understanding of this relationship is essential in making resource commitments, as profitability of options depends not only on the size and growth of the market, but also on the number of competitors likely to be encountered. This is particularly important in high-technology markets where changes occur rapidly and one cannot assume that either customer needs or competitors faced tomorrow will be the same as today. We simultaneously model changes in demand and number of competitors, including cross effects. The proposed model is estimated in three technology intensive markets--videocassette recorders, personal computers and work-stations. The results suggest that as more firms compete in a high-tech marketplace, there may be expansion in both the rate of diffusion and size of the potential market, possibly through increases in product differentiation, advertising/promotion, distribution and price competition. We also demonstrate that growth in the population of cometing firms is linked to demand dynamics. Finally, we show that the number of competitors is more closely related to price trends than the more traditional measure of cumulative volume that is based on experience curve methodology