Demystifying the Bass Diffusion Model: the hidden role of distribution channel

The goal of this paper is to uncover the hidden roles of distribution channels in the Bass Diffusion Model estimation. First, I show that the parameters in the BDM could be dramatically biased when a new product is launched in sequential rollout. This might partially explain commonly observed overestimation on contagion effects (WoM effects) in previous BDM literature. Second, I quantify the effect of distribution channel on parameters in the BDM model using a new micro level adoption patterns in a video-on-demand service controlling for internal and external communications, competition, and demographics. Contrary to the widespread belief on the BDM model, the estimated results show that the imitation parameter, „q‟ represents distribution channels‟ local promotional activities not the Word-of-Mouth effect. The innovation parameter, „p‟ is associated with both internal (Word-of-Mouth) and external (Advertising) communication channels. The two different 1 Sungjoon Nam is an Assistant Professor at Rutgers Business School, 1 Washington Street #992, Newark, NJ, 07102. [email protected]