Social influence and dynamic demand for new products

• We introduce a continuous time model of the evolution of consumers' preferences.
• Evolution is driven by product attributes and popularity and consumers' personality.
• Adoption of newly introduced products is not always helped by social influence.
• Initial fraction of adopters, products popularity are crucial in adoption process.
• Our framework includes: PDE's, preference change velocities, dynamic demand out-put.

In this paper we propose a novel continuous time model of the evolution of consumers' preferences for new versions of established products in a differentiated market setting. The evolution is driven by a combination of product attributes and social influence, the latter manifested via two factors: consumers' personality attributes and consumers' attention to the popularity of both the established product and the variant. Our model extends a classic static model of consumer preferences where a market is composed of a base product and its newer variants. We study the effects of heterogeneous consumer personality types (imitators, innovators), effects of changes in the price of the variants, and effects of consumers' innate tendency to change preferences, on adoption of new variants. We show that the role played by social influence in the dynamics of preference change can slow the adoption of a variant, depending on the initial size of the variant's market, its pricing relative to the well-known product, and its degree of “new”-ness. Our conclusion is that adoption of new variants of well established products is highest in two cases: when the proportion of innovators is small and the imitators' preferences change based more on variant's attributes than popularity (i.e., imitation is not all that swings their preferences), or when the proportion of innovators is higher and the imitators' preferences change based more on product's popularity. The novelty of our methodology includes the use of a partial differential equation (PDE) to describe the evolution of consumer groups' preferences, the incorporation of social influence and heterogeneity of consumers and the computation of dynamic market shares for all products on the market.