Modeling Consumers New Product Adoption Behavior with Choice Set Formation Stage

Abstract

In the present world, technological developments of unique innovations are introducing various products into the market, making the decision process of consumers more complicated than ever. As a result, consumers with limited information processing capacities are required to adopt a selection behavior that distinguishes certain alternatives for evaluating and comparing attributes of them among all possible alternatives. In other words, before the consumer makes a decision, they should formulate their own choice set with the potential alternatives. Such a change in consumer behavior is affecting the diffusion of innovative products, more specifically when the innovative product is not included or considered in the choice set of the consumer, the diffusion rate of the new product is expected to fail to meet expectations. Therefore, in order to accelerate the diffusion of new technology, it is essential for the marketers or policy makers to recognize consumers choice set formation behavior, and construct the marketing strategy or policies accordingly. In addition, understanding the nature of consumers choice set formation behavior will allow more precise estimation of consumers preferences for new technologies. In this dissertation, I propose a new model that incorporates the consumers choice set formation stage into product adoption behavior. Considering the model specification, I divide the consumers decision making process into three stages: choice set formation stage, product choice stage, and usage determination stage. The proposed model can directly analyze the effect of consumers choice set formation behavior on their preferences toward different alternatives. Furthermore, the proposed model can estimate how technological development and the changes in choice set formation behavior affect the market. In addition, this dissertation applies the proposed model on the automobile market to demonstrate the importance of considering consumers choice set formation behavior in market forecasts. The empirical study consists of three parts: 1) I examine how estimation results can vary according to the consumers choice set assumption when utilizing revealed preference data. 2) Through the application of the proposed model to analyze the automobile market, I derived multiple factors that affect the consumers choice set formation behavior, and how they change consumers preference for different types of automobiles. In addition, I examined how personal characteristics and the type of automobile affect the distance traveled for different consumers. 3) Based on the estimated results, I examine the proposed models strength as a forecasting framework by analyzing the changes in the automobile market and its ripple effects in various scenarios. Considering the analysis, I assume different scenarios that represent performance improvement of automobiles product innovation and changes in consumers choice set formation behavior through perception changes.