In this chapter, we study the pricing strategies of firms in a multi-product diffusion
model where we use a new formalization of the price effects. More particularly, we
introduce the impact of prices on one of the factors that affect the diffusion of new
products: the innovation coefficient. By doing so, we relax one of the hypotheses in
the existing literature stating that this rate is constant. In order to assess the impact of
this functional form on the pricing policies of firms selling optional contingent products,
we use our model to study two scenarios already investigated in the multiplicative form
model suggested by Mahajan and Muller (1991) (M&M).
We follow a ‘logical experimentation’ perspective by computing and com-
paring the results of three models: (i) The M&M model, (ii) a modified
version of M&M where the planning horizon is infinite, and (iii) our model,
where the new formalization of the innovation effect is introduced. This
perspective allows us to attribute the differences in results to either the
length of the planning horizon, or to our model’s formalization. Besides its
contribution to the literature on pricing and diffusion, this paper highlights the sensitiv-
ity of results to the hypothesis used in product diffusion modelling and could explain
the mixed results obtained in the empirical validations of diffusion models (Mesak,
1996).
