Business Dynamics and System Modeling

y y g
Chapter 9: Modeling the S‐Shaped 
Growthh

Pard Teekasap
Pard Teekasap
Southern New Hampshire University
 Outline
1. Logistic Growth
2. Modeling Epidemics
Modeling Epidemics
3. Innovation Diffusion
 General Concept of S‐Shaped Growth
General Concept of S Shaped Growth
• The S‐Shaped growth occurs if there is no 
feedback delay from the constraint
y
• With the delay in negative feedback, the 
behavior will be S shaped growth with
behavior will be S‐shaped growth with 
overshoot and oscillation
• If the carrying capacity is consumed by the 
growing population, the behavior will be
growing population, the behavior will be 
overshoot and collapse
 Logistic Growth
Logistic Growth
Net Birth Rate = g(P,C)P = g*(1‐P/C)P
P g P2/C
= gg*P‐g*P
Pinf = C/2
• P = Population; C = Carrying Capacity
• g(P,C) = fractional growth rate
g(P C) = fractional growth rate
• g* = maximum fractional growth
• Pinf = Population when the net growth rate is 
maximum
 Why Logistic Model is Important
Logistic Model is Important
• Many S‐Shaped growth processes can be 
approximated well by the logistic model
pp y g
• The logistic model can be solved analytically
• The logistic model can be transformed into a 
h l i i d l b f di
linear form so the parameters can be 
estimated based on OLS
Analytic Solution for Logistic Equation
Analytic Solution for Logistic Equation
dP ⎛ P⎞
= g * ⎜1 − ⎟ P
dt ⎝ C⎠
dP
= g * dt
⎛ P⎞
⎜1 − ⎟ P
⎝ C⎠
dP
∫ ⎛ P ⎞ = ∫ g * dt
⎜1 − ⎟ P
⎝ C⎠
CdP ⎡1 1 ⎤
∫ (C − P) P = ∫ ⎢⎣ P + (C − P) ⎥⎦ dP = ∫ g * dt
ln( P) − ln(C − P) = g * t + c
ln( P) − ln(C − P) = g * t + ln( P(0)) − ln[C − P(0)]
P P(0)e g *t
=
C − P C − P ( 0)
C
P (t ) =
⎡ C ⎤
1+ ⎢ − 1⎥ e − g *t
⎣ P (0) ⎦
 Behavior of Logistic function
Behavior of Logistic function
Rate

g*
al Net Growth R

g(P,C)
( C)
The logistic model
0
0 1
Fractiona

Population/Carrying Capacity
(dimensionless)
1.0 0.25

Net Birth Rate//Carrying Capacity

P = 1

ying Capacity
Positive Negative C 1 + exp[-g*(t - h)]
Feedback Feedback
Dominant Dominant g* = 1, h = 0

(dimensionless)

(1
1/time)
Population/Carry

0.5

Net Growth Rate

wth Rate

(Right Scale)

Population
P

•0 •
Net Grow

0 (Left Scale)
(P/C)inf = 0.5 0.0 0
1 Stable
Equilibrium -4 -2 0 2 4
Unstable Time
Equilibrium

Population/Carrying Capacity
(dimensionless)
 Dynamics of Disease
Dynamics of Disease
300

nfined to bed
Influenza epidemic at an English boarding
school, January 22-February 3, 1978. 200
The data show the number of students
Confined to bed for influenza at any time

Patients con
(the stock of symptomatic individuals).
100

0
1/22 1/24 1/26 1/28 1/30 2/1 2/3

1000
ople/week)

Epidemic of plague, Bombay, 750

India 1905-6. Data show the
death rate (deaths/week).
500
Deaths (peo

250

0
0 5 10 15 20 25 30
Weeks
 SI Model
SI Model
Susceptible Infectious
Population Population
S Infection I
Rate
B R
IR
Depletion Contagion

+ + - + +

Contact
Infectivity
Rate
Total i
c
p
Population
N
 Equation for SI Model
Equation for SI Model
• I = INTEGRAL(IR,I0)
• S = INTEGRAL(
INTEGRAL(‐IR,N‐I
IR,N I0)
• IR = (ciS)(I/N)
• S + I = N
• IR = ciI(1‐I/N)
IR = ciI(1 I/N)
• Compare to logistic growth model
• Net Birth Rate = g*(1‐P/C)P
 Assumptions for SI Model
Assumptions for SI Model
• Births, deaths,
h d h and migration are ignored
d d
• Once people are infected, they remain 
p p , y
infectious indefinitely. Therefore, the model 
pp ,
applies to chronic infections, not acute illness
• The population is homogeneous: all members 
are assumed to interact at the same average
are assumed to interact at the same average 
rate
• There is no recovery, quarantine, or 
Th i ti
immunization
Is SI Model a second‐order model?
SI Model a second order model?
• Absolutely not
• Even though the model has two stocks, they 
Even though the model has two stocks, they
are interdependent
• S + I = N
S I N
 SIR Model
SIR Model

Susceptible Infectious Recovered

Population Population Population
S I Recovery R
Infection
B Rate R B Rate
Depletion IR Contagion Recovery RR
+ + -+ + + -

Contact Infectivity
Rate i
Total Average Duration
c
Population of Infectivity
N d
 Equation for SIR Model
for SIR Model
• S = INTEGRAL(‐IR,N‐I0‐R0)
• I I = INTEGRAL(IR
INTEGRAL(IR‐RR,I
RR,I0)
• R = INTEGRAL(RR,R0)
• IR is the same as SI model
• RR = I/d
RR = I/d
 Is SIR model a second order?
Is SIR model a second‐order?
• Yes
• Even though it
Even though it has 3 stocks, only two are 
has 3 stocks, only two are
independent
 Simulation of SIR model
Simulation of SIR model 2500

nd Recovery Rates
2000 Infection
Rate

eople/day)
1500

(pe
Figure 9 9-6
6 Simulation of Infection an 1000
Recovery
an epidemic in the SIR Rate
model. The total 500
population is 10,000. The
contact rate is 6 per person
0
per day, infectivity is 0.25, 0 4 8 12 16 20 24
and average duration of 10000 Days
infectivity is 2 days. The
ple)

initial infective population is

ulation (peop

Susceptible Recovered
1, and all others are initially 7500
susceptible.

5000
eptible Popu

2500 Infectious
Susce

0
0 4 8 12 16 20 24
Days
 How can epidemic happen?
How can epidemic happen?
• IR > RR
• ciS(I/N) > I/d
ciS(I/N) > I/d
• cid(S/N) > 1
• cid = contact number
• cid(S/N) = reproduction rate
cid(S/N) = reproduction rate
 Effect of contact rate
Effect of contact
c<2
10000
ation (people)

c=2
c = 2.5
7500
e Popula

5000 c=3

c=6
sceptible

2500
Sus

0
0 10 20 30 40 50 60
Days
 Contact Number VS Population 
Fraction
25

cid(S/N)
( )=1
act Number (cid)
nless)
mension

Epidemic
(Unstable; positive loop dominant)
(dim
Conta

No Epidemic
0 (Stable; negative loops dominant)
0 1
Susceptible Fraction of Population (S/N)
(dimensionless)
 Herd Immunity
Herd Immunity
• Situation that the contact number is small 
enough that
g the system is below the tipping 
y pp g
point
• With the herd immunity, the arrival of infected 
With the herd immunity the arrival of infected
individual does not produce an epidemic
• However, change in contact rate, infectivity, or 
duration of illness can push a system past the
duration of illness can push a system past the 
tipping point
 Epidemic Wave
1.5
Positive
Loop
es per infective)

Dominant
oduction Rate

1.0 Tipping Point

Negative
g
(new case
Repro

0.5 New Cases per Infective Loops

Dominant 150
Prior to Recovery
Infectious

ectious Population (people)

Population

0.0 100
0 500 1000 1500 2000
Days

50

Infe
0
10000
0 500 1000 1500 2000
n (people)

Days
Susceptible
7500 Population

• Contact rate is continuously increased
Contact rate is continuously increased
eptible Population

5000 • A single infected individual arrives 
every 50 days
2500
Susce

0
0 500 1000 1500 2000
Days
 Diffusion of new ideas and new 
product
• Th
The diffusion and adoption of new ideas and new 
diff i d d ti f id d
products follows S‐shaped growth
• What are the positive feedbacks?
What are the positive feedbacks?
• What are the negative feedbacks?
• People who adopted the product come into 
P l h d d h d i
contact with those who haven’t, exposing them 
to it and infecting some of them with the desire
to it and infecting some of them with the desire 
to buy
• However, the system is limited by number of 
However the system is limited by number of
population
 New product adoption model
New product adoption model
Potential
P t ti l
Adopters
Adopters
A
P Adoption
B Rate R
AR
Market Word of
Saturation Mouth
+ + - + +

Contact
Adoption
R t
Rate
Total Fraction
c
Population i
N
The case of DEC VAX 11/750
The case of DEC VAX 11/750
3000

Sales Rate

2000
Units/Year

1000

0
1981 1983 1984 1986 1988
8000
Cumulative Sales
(- Installed Base)
6000
Units
s

4000

2000

0
1981 1983 1984 1986 1988
How to estimate the parameters?
How to estimate the parameters?
A A0
= e g 0t

N − A N − A0
⎛ A ⎞ ⎛ A0 ⎞
l ⎜
ln l ⎜⎜
⎟ = ln ⎟⎟ + g 0t
⎝ N − A⎠ ⎝ N − A0 ⎠
⎛ A⎞ ⎛ A0 ⎞
ln⎜ ⎟ = ln⎜⎜ ⎟⎟ + g 0t
⎝P⎠ ⎝ P0 ⎠
Use linear regression to get the parameter
Use linear regression to get the parameter
 Fitting Logistic Model into Product 
1000
Diffusion
Estimated Ratio of A/P
Potential Adopterrs

(Adopters/Potential Adopters):
100
ln(A/P) = -5.45 + 1.52(t - 1981); R 2 = .99
mensionless)

10

1
Data
Adopters/P
(dim

0.1
8000
0.01 Estimated
Installed Base
Regression 6000
0.001
1981 1983 1984 1986 1988

Units
4000
Cumulative Sales
(- Installed Base)

2000

3000 0
Estimated
Sales Rate 1981 1983 1984 1986 1988

2000 Sales Rate

S
Units/Year

1000

0
1981 1983 1984 1986 1988
 However, it’s not practical for
forecasting
• The entire sale history was used
• The final value of installed base is needed
The final value of installed base is needed
• How can we know what is the final value for a 
new product?
d ?
 Getting the fractional growth rate
the fractional growth rate
• From g(C,P) = g*(1‐P/C)
• Mapping the fractional growth with the 
Mapping the fractional growth with the
adopters
• The slope is ‐g*/C. The intercept is g*
h l i */C h i i *
Logistic model for US cable subscribers
Logistic model for US cable
0.3

s)
h Rate (1/years Data
0.2
ctional Growth

0.1

Best Linear Fit

(g = 0.18
0 18 - 0 0024S; R 2 = .52)
0.0024S; 52)
Frac

0
0 10 20 30 40 50 60
Cable Subscribers
(million households)
100

Estimated Cable
Subscribers
75
eholds
Million House

50

25

Cable Subscribers
0
1950 1960 1970 1980 1990 2000 2010
 However the prediction is uncertain
However, the prediction is uncertain
• Actual fractional growth rate varies 
lf l h
substantially around the best fit
• The best fit is changed when the historical 
p
period change, and also the forecast will 
g ,
change
• Logistic model presumes a linear decline in 
model presumes a linear decline in
the fractional growth rate as population 
grows However no compelling theoretical
grows. However, no compelling theoretical 
basis for linearity
 Which forecast is correct?
Which forecast is correct?
150

Estimated Cable
Subscribers
Subscribers,
Gompertz Model
eholds

100
on House

Estimated Cable
Subscribers
Subscribers,
Millio

50
Logistic Model

Cable Subscribers
0
1950 1960 1970 1980 1990 2000 2010 2020
Logistic curve can fit data well, but you 
shouldn’t use it
• Th
The ability to fit the historical data does
bilit t fit th hi t i l d t d not mean 
t
the forecast is correct
• “By the time sufficient observations have 
“By the time sufficient observations have
developed for reliable estimation, it’s too late to 
use the estimates for forecasting purposes ”
use the estimates for forecasting purposes.
• A purpose of modeling is to design and test 
policies. The ability to fit the historical data
policies. The ability to fit the historical data 
provides no information about if its response to 
policies will be correct
• The logistic model can’t generate anything but 
growth
 So which model is right?
So, which model is right?
• The ability of a model to replicate historical 
h bl f d l l h l
data does not indicate that the model is useful
• Failure to replicate historical data does not 
mean a model should be dismissed
• The utility of a model requires the modeler to 
decide whether the structure and decision
decide whether the structure and decision 
rules of the model correspond to the actual 
structure and decision rules used by the real
structure and decision rules used by the real 
people
 Bass Diffusion Model
Bass Diffusion Model
• Logistic model has some startup problems 
d lh bl
q
• zero is equilibrium 
• the positive feedback during the beginning of 
the growth process is weak
the growth process is weak
• There are several channels besides word of 
mouth
• Bass solved the startup problem by assuming 
the potential adopters know the products 
through external information
 Bass Diffusion Model
Diffusion Model
Potential
Adopters
Adopters
A
P Adoption
Rate
B AR R
Market Word of
Saturation + + Mouth

Adoption Adoption Total

+ Population
from from Word +
Advertising B of Mouth N
-
Market + Adoption
+ Saturation + +
Advertising
Ad ertising Fraction
Effectiveness i
a Contact
R t
Rate
c
 Equation for Bass Model
Equation for Bass Model
• AR = Adoption from Advertising + Adoption 
from Word of Mouth
• Adoption from Advertising = aP
• Adoption
Ad i from Word of Mouth = ciPA/N
f W d f h i A/N
• AR = aP + ciPA/N
/
 Behavior of the Bass Model
Behavior of the Bass Model 8000

Logistic Model
6000 Bass Model

Units
4000
Cumulative Sales
(- Installed Base)

2000
3000
Logistic Model
0
1981 1983 1984 1986 1988
2000 Sales Rate
ar
Units/Yea

Bass Model

1000

0
3000
1981 1983 1984 1986 1988

2000
Units/Year

Sales from
1000 Word of Mouth
Sales Rate

Sales from Advertising

0
1981 1983 1984 1986 1988
The model with replacement purchase
The model with replacement
Average Product Life
- l

Discard B
R
Rate Replacement
+ Purchase

Potential
Adopters
Adopters
A
P Adoption
B Rate R
Market AR Word of
Saturation Mouth
+ + Total
+ Adoption Adoption Population
from B from Word + N
Advertising Market of Mouth -
Saturation Adoption
+ + +
Advertising + Fraction
Effectiveness i
Contact
a
Rate
c
 Another model with replacement 
+
purchase
+ Sales Rate
+ Average
Initial Sales Initial Repeat +
Consumption
per Adopter Purchase Purchase
per Adopter
Rate Rate
+ +
Potential
Adopters
Adopters
A
P Adoption
B Rate R
Market AR Word of
S t
Saturation
ti Mouth
+ + Total
+ Adoption Adoption Population
from B from Word +
N
Advertising M k t
Market of Mouth -
Saturation Adoption
+ + +
Advertising + Fraction
Effectiveness i
Contact
a
Rate
c
 The difference between two models
The difference between two models
• The first model assumes that when adopters
h fi d l h h d
discard the products, they will become the 
potential adopters who need to make a decision 
t ti l d t h dt k d ii
again
• The second model assumes that the adopters still 
have the same decision and repurchase the 
product again without listening to other people
d i ih li i h l
• The first model is for the products with long 
average life. When they need to buy it again, the 
decision environment change.