Bias and Systematic Change in the Parameter Estimates of Macro-Level Diffusion Models

Abstract

Studies estimating the Bass model and other macra-leveldiffusion models with an unknown ceiling feature three curious empirical regularities: (i) the estimated ceiling is often close to the cumulative number of adopters in the last observation period, (ii) the estimated coefficient of social contagion or imitation tends to decrease as one adds later observations to the data set, and (iii) the estimated coefficient of social contagion or imitation tends to decrease systematically as the estimated ceiling increases.We analyze these patterns in detail, focusing on the Bass model and the nonlinear least squares (NLS) estimation method. Using both empirical and simulated diffusion data, we show that NLS estimates of the Bass model coefficients are biased and that they change systematically as oneextends the number of observations used in the estimation. We also idenhfy the lack of richness in the data compared to thecomplexity of the model (known as ill-conditioning) as the cause of these estimation problems.In an empirical analysis of twelve innovations, we assess how the model parameter estimates change as one adds later observations to the data set. Our analysis shows that, on average, a 10% increase in the observed cumulative market penetration is associated with, roughly, a 5% increase in estimated market size m, a 10% decrease in the estimated coefficient of imitation q, and a 15% increase the estimated coefficient of innovation p.A simulation study shows that the NLS parameter estimates of the Bass model change systematically as one adds later observations to the data set, even in the absence of model misspecification. We find about the same effect sizes as in the empirical analysis. The simulation also shows that the estimates are biased and that the amount of bias is a function of (i) the amount of noise in the data, (ii) the number of data points, and (iii) the difference between the cumulative penetration in the last observation period and the true penetration ceiling (i.e., the extent of right censoring). All three conditions affect the level of ill-conditioning in the estimation, which, in turn, affects bias in NLS regression. In situations consistent with marketing applications, m can be underestimated by 20% p underestimated by the same amount, and q overestimated by 30%.The existence of a downward bias in the estimate of m and an upward bias in the estimate of q, and the fact that these biases become smaller as the number of data points increases and the censoring decreases, can explain why systematic changes in the parameter estimates are observed in many applications. A reduced bias, though, is not the only possible explanation for the systematic change in parameter estimates observed in empirical studies. Not accounting for the growth in the population, for the effect of economic and marketing variables, or for population heterogeneity is likely to result in increasing m and decreasing $ as well. In an analysis of six innovations, however, we find that attempts to address possible model mis...

Measuring marketing‐mix effects in the 32/64 bit video‐game console market

“…The estimated market size parameter is quite close to the cumulative sales at the end of the last period (about 45 million units). This property of the model has been discussed elsewhere (e.g., Van den Bulte and Lilien, 1997;Venkatesan et al, 2003). Moreover, it is smaller in magnitude compared to that estimated for the proposed model (although, since the standard errors are large, the difference is not statistically significant).…”

Single firm product diffusion model for single-function and fusion products

“…Norton and Bass (1987) use the same innovation and imitation parameters to fit the diffusion data of different generations of DRAM. However, van den Bulte and Lilien (1997) point out that this model does not account for the decline of real prices, improving product performance, and increasing distribution penetration. These factors increase the total adopters and result in a downward pressure on the estimates (i.e., ψ and φ).…”

Forecasting and operational research: a review

“…Estimation with larger data sets is via maximum likelihood or nonlinear least squares (NLS). The influential Marketing Science paper of Van den Bulte and Lilien (1997) established bias in the parameter estimates and concluded that an accurate estimate of the diffusion path and 'ultimate market size . .…”