A Simultaneous Model for Innovative Product Category Sales Diffusion and Competitive Dynamics

Diffusion of innovation has been the focus of an entire stream of research in marketing, and firm entry and exit decisions have been investigated by marketers, strategists, and economists. However, little attention has been paid to the relationship between changing demand and the entry and exit behaviors of competitors in the marketplace. Understanding 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 innovative 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 demand and number of competitors, including the interactive relationship between these dynamics in the marketplace, and empirically investigate three technology-intensive markets—video cassette recorders, personal computers, and workstations. Our results suggest that competition and demand impact entry and exit, but that the nature of this impact may depend on whether or not a `shakeout' has occurred in the marketplace. Further, an increasing number of competitors may lead to improved marketplace offerings, resulting in demand expansion.