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MAXIMUM LIKELIHOOD ESTIMATION FOR AN


INNOVATION DIFFUSION MODEL OF NEW
PRODUCT ACCEPTANCE*
DAVID C. SCHMITTLEINt AND VIJAY MAHAJANt
A maximum likelihood approach is proposed for estimating an innovation diffusion
model of new product acceptance originally considered by Bass (1969). The suggested
approach allows: (1) computation of approximate standard errors for the diffusion
model parameters, and (2) determination of the required sample size for forecasting the
adoption level to any desired degree of accuracy.
Using histograms from eight different product innovations, the maximum likelihood
estimates are shown to outperform estimates from a model calibrated using ordinary
least squares, in terms of both goodness of fit measures and one-step ahead forecasts.
However, these advantages are not obtained without cost. The coefficients of innovation and imitation are easily interpreted in terms of the expected adoption pattern, but
individual adoption times must be assumed to represent independent draws from this
distribution. In addition, instead of using standard linear regression, another (simple)
program must be employed to estimate the model. Thus, tradeoffs between the
maximum likelihood and least squares approaches are also discussed.

1.

Introduction

In recent years, a number of models have been developed to represent the


spread of a new product in the marketplace (Wind, Mahajan and Cardozo
1981). In particular, diffusion theory has often been used to model the
first-purchase sales growth of a new product over time and space (Mahajan
and Muller 1979). Diffusion theory suggests that there is a time lag in the
*Received March 1981. This paper has been with the authors for 1 revision.
Key words. Diffusion of innovations, new product forecasting, maximum likelihood.
tDepartment of Marketing, The Wharton School, University of Pennsylvania, Philadelphia,
Pennsylvania 19104.
The authors would like to thank Christopher Easingwood for supplying the data on medical
innovations, Abba Krieger and Yoram Wind for their helpful comments and suggestions. This
research was supported by the Center for Marketing Strategy Research, The Wharton School,
University of Pennsylvania.
57
MARKETING SCIENCE
Vol. 1, No. 1, Winter 1982
Printed in U.S.A.

0732-2399/82/0101/0057$01.25

Copyright ? 1982, The Institute of Management Sciences

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58

DAVID C. SCHMITTLEIN AND VIJAY MAHAJAN

adoption of products by different members of a social system. The product is


first adopted by a select few innovators who, in turn, influence others to adopt
it. Thus it is the "interaction" or interpersonal communication (word-ofmouth) between adopters and non-adopters that is posited to account for the
rapid growth stage in the diffusion process (Rogers and Shoemaker 1971).
The best known first-purchase diffusion models of new product acceptance
in marketing are those of Bass (1969), Fourt and Woodlock (1960), and
Mansfield (1961). In particular, the Bass model has been successfully demonstrated in retail service, industrial technology, agriculture, and consumer
durable sectors (Bass 1969; Dodds 1973; Nevers 1972). Some attempts have
also been made to incorporate strategic marketing variables such as price
(Robinson and Lakhani 1975; Bass 1980), advertising (Horsky and Simon
1978; Dodson and Muller 1978), promotion (Lilien, Rao and Kalish 1981),
product interrelationships (Peterson and Mahajan 1978) and market size
(Mahajan and Peterson 1978) into this model. Dodson and Muller (1978) and
Lilien, Rao and Kalish (1981) have extended these modelling efforts to include
repeat purchase. Furthermore, Lilien, Rao and Kalish (1981) and Bretschneider and Mahajan (1980) have suggested Bayesian and feedback estimation procedures, respectively, to update the model parameters as additional
sales data become available. A limited extension incorporating the spatial
dimension into the diffusion model has been reported by Mahajan and
Peterson (1979).
One statement of the Bass model' is that
dN(t)
______
dt

((P+^N^Ym

m N(t))))(m

(1)

where N(t) is the cumulative number of adopters at time t, m is the ceiling, p


is the coefficient of innovation and q is the coefficient of imitation. In
considering the timing of initial purchase of a new consumer product, Bass
uses a discrete analog of equation (1). That is, P(t), the probability that an
initial purchase will be made in the interval [t - 1, t] given that no purchase
has yet been made, is a linear function of the number of previous adopters.
Thus
P(t) =p + (

)N(t-

1).

Since N(0) = 0 the constant p is the probability of an initial purchase in the


first time interval.
Given that the remaining number of nonadopters at time t- 1 is mN(t - 1), the expected number of incremental adopters, X(t), in interval
'This model was developed for the diffusion of news in a social group, by Taga and Isii (1959).

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INNOVATION DIFFUSION MODEL OF NEW PRODUCT ACCEPTANCE

59

[t- 1,t]

E(X(t))

= (P +

N(t - 1))(m-

1)).

N(t-

(2)

The parameters p, q and m in equation (2) are generally estimated via


ordinary least squares (Bass 1969) or nonlinear optimization techniques
(Dodds 1973) since we can write
- 1) - q
m N2(t

X(t) =pm + (q -p)N(t


= a, +
a2N(t-

1) + a3N2(t-

1) +

(t)

1) + E(t)

(3)

where a, = pm, a2 = (q - p), a3 = - q/m, E[e(t)] = 0, Var[E(t)] = o2 and E(ti)


is independent of E(tj) for i =j. Given regression coefficients al, a2 and a3,
the estimates of the parameters p, q and m can be easily obtained. That is,

p= a/m

(4)

q= -ma

(5)

and

(-a

m=~~

2aj

- 46163
*(6)

As is clear from equations (4)-(6), in the presence of few time-series data


points and multicollinearity between variables, one may obtain parameter
estimates which are unstable or possess wrong signs. Commenting on the
inappropriateness of deriving the diffusion model parameters from regression
equation (3) and equations (4)-(6), Heeler and Hustad (1980, p. 1020) write:
Clearly, an infinity of alternative reformulations of al, a2, and a3 are possible. All
will yield the same predictions when substituted back. The good fit of the model to the
data supports the utility of a quadratic power series for adoption-type time series. The
result is not too surprising as unimodal data usually can be fitted closely with a
quadratic Taylor series. The good fit does not in itself support the particular reformulation of a1, a2 or a3 into p, q, and m. Ceteris paribus p, q, and m have intuitive appeal
because of their deduction from the processes behavioral scientists have observed in
diffusion. But it is these social science findings rather than the model fit which justify p,
q, and m.

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60

DAVID C. SCHMITTLEIN AND VIJAY MAHAJAN

To follow up on this point, note that the left side of equation (2) should
theoretically be the derivative of N(t) and not the difference represented by
X(t). This substitution causes a problem in that, as defined, X(t) will underestimate dN(t)/dt for time intervals before the maximum adoption rate is
reached and will overestimate after that point.
The purpose of this paper is to propose and develop a maximum likelihood
approach to estimating the parameters of innovation diffusion models of new
product acceptance; more specifically, a new product growth model proposed
by Bass. It will be shown that the approach allows:
(i) computation of approximate standard errors for the diffusion model
parameters-p, q, and m, and
(ii) determination of the required sample size for forecasting the adoption
level to any desired degree of accuracy. That sample size is shown to depend
both on the parameters determining the adoption process and the method
used to group the time series data.
The next two sections outline the maximum likelihood estimates (MLE) and
their sampling properties. These results are then used in ?4 to compare the
maximum likelihood formulation with OLS estimates above for data on eight
different product innovations. Finally, ?5 deals with the issue of required
sample sizes for parameter estimation-particularly in forecasting the ultimate
adoption level.
2. A Maximum Likelihood Approach
In his 1969 paper, Bass also states that, for eventual adopters, the likelihood
of purchase at time t given that no purchase has yet been made can be written
f(t)
f-(t
1- F(t)

+ qF(t)

(7)

where f(t) is the likelihood of purchase at t and


F(t) =

f(t)dt.

From equation (7) the probability density function for adoption at time t can
be expressed as:
f(t) = (p + qF(t))(1 - F(t)).
Using the initial value condition that F(0) = 0, integration of the above
equation yields the cumulative distribution function (c.d.f.) for eventual

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INNOVATION DIFFUSION MODEL OF NEW PRODUCT ACCEPTANCE

61

adopters:
(1 - e-bt)

F(t)

(1+

ae-b
ae-bt)

where a = q/p and b = (p + q). Since this c.d.f. is clearly only appropriate
for eventual adopters the probabilities associated with it are conditional
probabilities. Thus in a system where the probability of eventually adopting is
c, the unconditional probabilities for adoption times are given by:
c(l - e-bt)
-b .
F(t) =

(8)

(1 + ae-b)

In a sample of size M taken from the process the expected number of


eventual adopters is cM. Again letting N(t) be the cumulative number of
adopters by time t, we have
E(N(t)) = cMF(t).
Differentiating,
dE(N(t))

dEt

E(N(t))

[cM

E(N(t))].

The fact that this is not equivalent to equation (1) illustrates an important
distinction between a model beginning with a distribution for adoption times
(equations (7)-(8)) and one using the differential equation formulation (equation (1)-(2)).2 Thus, while parameters p and q may still be interpreted as
coefficients of innovation and imitation (based on their impact on the c.d.f.and hence on expected behavior) they are not directly comparable to p and q
obtained by ordinary least squares.
Equation (8) represents the (c.d.f.) of adoption time for an individual
chosen at random from the population. In the applications of the model,
however, the individual adoption times are not known and instead a histogram with the number of individuals falling in each time interval is used to fit
the model. That is, let T equal the number of time intervals for which the data
are available and xi be the number of individuals who adopt the innovation in
time interval (ti_ , ti), i = 1,2, . . , T. Then typically to -0 and t - oo, with
Type I censoring occurring at time tT 1. In other words, one knows that XT
individuals did not adopt by time tT_ , but has no other information about
their adoption times, where by definition xT = M - Ci=l xi.
2We are grateful to Abba Krieger for pointing out this fact.

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62

DAVID C. SCHMITTLEIN AND VIJAY MAHAJAN

It has been well established (see, for example, Rao 1965) that under very
general regularity conditions, maximum likelihood estimates are best asymptotically normal. That is, they are consistent, asymptotically normal and
asymptotically efficient. In order to determine the maximum likelihood estimates of p, q, and m, we first generate the maximum likelihood estimates of a,
b, and c. Note that, due to the 1-1 correspondence between a, b, and c and p,
q, and m the maximum likelihood estimators for p, q, and m are easily
obtained from the maximum likelihood estimators for a, b, and c by the
following expressions:
p

C)(9)

(Ab

ab

(10)

(a + 1)()
and
mi= cM

(11)

Using equation (8), the likelihood function for the observed histogram of a
particular innovation can be written as:
-

L(a,b,c, xi) =[

T-I

F(t-Irl)

]T

i=1

[F(ti)-

F(ti-1)]xi

(12)

and the logarithm of the likelihood function is given by:


-

T-1

l(a,b,c,xi)=

xi [lnc + In-

i=l

+xln[--c

Il-e

-bt,

bI-bt
1+I ae - otI

,]
1+ ae - bt~_

--e-bt
+ ae-btT
-

(13)

Note that in this model the impact of the diffusion process is felt through
the model's parameters. The coefficients of innovation and imitation determine the shape of the c.d.f., with such characteristics as a small value of q
implying slow expected growth, etc. Given these parameters, the likelihood
function (12) takes all individuals as independent draws from that particular
distribution (with given expected diffusion characteristics). Although more
direct word of mouth effects might be proposed, a tractable method for
incorporating them in this framework has yet to be developed.

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INNOVATION DIFFUSION MODEL OF NEW PRODUCT ACCEPTANCE

63

Explicit formulas for parameters a, b, and c which maximize l(a, b, c, xi) do


not exist; hence the MLE's are obtained by using the Hooke-Jeeves accelerated pattern search (Himmelblau 1972). This procedure has previously been
shown to be effective in fitting duration time distributions (Morrison and
Schmittlein 1980) and repeat purchase data (Kalwani and Silk 1980). The
procedure restricts the values of the estimated parameters a, b and c to reflect
the logical restrictions (a > 0, b > 0, 0 < c < 1). Copies of the two BASIC
programs which estimate the parameters and calculate their sampling properties (see below) are available from the first author.
3.

Sampling Properties of the Parameter Estimates

As is the case with many common distributions, small sample properties of


the MLEs for the model above are extremely difficult to obtain except
through simulation. (Shenton and Bowman (1977) provide a comprehensive
illustration of this problem). However, one can estimate those properties using
the asymptotic normality of the MLEs. To this end, the asymptotic covariance
matrix for the parameters a, b, and c is derived, and then used to generate the
corresponding matrix for p, q, and m. The detailed formulas are included in
the appendix and only the final equations are presented here.
It is well known that, under regularity conditions, joint maximum likelihood
estimates (of, say, parameters 1,, ... , Ok) tend to a multivariate normal
distribution as the sample size M becomes infinite, with covariance matrix
E=

v-1

where the elements of the matrix V= [vij] are the expected values

v = -E

(14)

aiasj

and / is the log likelihood function.


For the estimated parameters a, b, and c, the asymptotic covariance matrix
is
aaa

Uab

Obb

aac
bc

= V-

(15)

where the information matrix V is


Vaa
V =

Vab
Vbb

Vac
Vbc

Vcc

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(16)

64

DAVID C. SCHMITTLEIN AND VIJAY MAHAJAN

Using equations (13) and (14), the elements of the information matrix V,
equation (16), can be determined. The derivations of these elements are
included in the appendix. Knowing V, 2 could clearly be written out explicitly; but since the determinant and cofactors of V do not reduce appreciably
such a derivation did not seem worthwhile and was not undertaken. In an
actual application, it is easier to calculate V and then invert the 3 x 3 matrix
to find E. Note in the appendix that the covariance matrix, 2, depends on
both the true values of parameters a, b, and c, and the method of grouping
and censoring the adoption data (t,, . . , tT). (See equations A3-A16.) Therefore, in addition to obtaining confidence limits for the parameters, the
efficiency of different data collection and report schemes can be evaluated.
Once the covariance matrix E for a, b, and c is obtained, the corresponding
variances and covariances of the MLE's pf,q, and m can be written using the
elements in equation (15) as: (see Kendall and Stuart, 1977, p. 247)
Obb
b2 a +
(
14
(a + 1)2
(a + 1a

a =

q = (a

-bq2

1)+ (a

(a+
aq=

c(a

+ i)2b

a2

a + 1)
+

b(a - 1)
a(ab' 18) (

(17)

(18)

()1)

b2

bca^

oa=

(a+,)2

b(ac

2b
2
ab
(a + 1)3

2ab

(a +

aac

auTc

(21)

(22)

M2bac

4.

EmpiricalResults

To illustrate the application of the maximum likelihood estimation procedure, time series data for four consumer durables and four medical technological innovations

were examined. For the consumer durables, the time series

were restricted to the early years of sales growth to help avoid replacement or
repeat purchases, and the data were collected from the Statistical Abstracts of
the United States.

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INNOVATION DIFFUSION MODEL OF NEW PRODUCT ACCEPTANCE

65

All the published applications of the Bass model (including our application
to four consumer durables) have assumed the availability of the adoption time
series data on the entire population of the potential adopters. Since statistical
inference from the estimation equation (3) is not possible, the utilization of
such an application strategy is understandable. However, in some situations
such a data base may be unavailable or prohibitively expensive to construct.
As an alternative, one might estimate the life cycle of a new product from a
survey of the target market; For example, a company contemplating a new
product introduction may be interested in estimating the market potential (i.e.,
m) and industry growth rate (i.e., q). If the adoption census data are not
available, it may be necessary to estimate these parameters from a survey of
the target market consisting of both adopters and nonadopters.
With this in mind, survey data for four pieces of radiological equipment
(Ultrasound, CT Head-Scanner, CT Body Scanner and Mammography) were
analyzed. The data were collected from 209 hospitals throughout the U.S.A.,
i.e., M = 209. The hospitals were asked to identify themselves as adopters/
nonadopters and, if adopters, provide the date of adoption (see Robertson and
Wind (1980) for details of this survey). The survey indicated that by 1978,
of the 209 hospitals, 168 (80.38%) had adopted Ultrasound, 113 hospitals
(54.07%) had adopted CT Head Scanner, 97 hospitals (46.41%) had adopted
CT Body Scanner and 119 hospitals (56.94%) had adopted Mammography.
4.1. ConsumerDurables
The four consumer durables examined were clothes dryers, room air conditioners, color televisions and dishwashers. In order to evaluate the effectiveness of maximum likelihood estimates, ordinary least squares estimates using
the differential equation model (equation (3)) were also obtained.
Table 1 summarizes the MLE and OLS estimates for the parameters p, q,
and m and also provides the estimated time of peak sales, t*. (For the sake of
brevity, regression coefficients a,, a2, and a3 in equation (3) are not reported.
Only the estimates of p, q, and m generated via equations (4)-(6) are
provided). We stress again that although MLE and OLS estimates of p and q
have similar behavioral interpretations, they come from different models and
are not strictly comparable. The mean absolute deviation and mean squared
error are reported in Table 2, and the actual and fitted sales estimates for the
four products are depicted in Figures 1-4. Some important comments on these
results are warranted:
* For dishwashers, the OLS procedure yielded an inappropriate sign for the
regression coefficient a3, i.e., a, = 166.1017, a2 =.0985, a3 =.6874 x 10-5
(with R2 =.90). As equation (5) indicates, a positive sign for regression
coefficient (3 would give a negative sign for the parameter q. The MLE
estimates, however, possessed correct signs for all products analyzed. Naturally, the high R 2-value supports the observation made by Heeler and Hustad
(1980) that the quadratic sales response function generally fits the data well.
* For clothes dryers, room air conditioners and color T.V. Figures 1-3 and
the statistics reported in Table 2 clearly indicate that the maximum likelihood

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TABLE 1
Parameter Estimates for ConsumerDurables*
Product

Period
Covered

Clothes
Dryers

19491961

.0237

.3248

1949Room Air
Conditioners 1961

.0200

19631970

.0443

Color T.V.

Dishwashers

19491961

.3891

OLS
c
m(103)
.2937

.3249

15652

17314

t*

.0120
(.000003)

.3512
(.000087)

7.5114

7.2552
.0072
.4228
(.0000013) (.000074)

.6295

.5519

36117

--

3.9388
.0160
(.000002)

.6566
(.000080)

.0035
(.000005)

.1282
(.00018)

*For MLEs, numbers in parentheses are standard errors. Sample size taken as number
collection period:
# households, 1961: 53,291,000
# households, 1970: 65,444,000

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INNOVATION DIFFUSION MODEL OF NEW PRODUCT ACCEPTANCE

67

TABLE 2
Fit Statistics for ConsumerDurables
Mean Absolute Deviation
MLE
OLS

Product
Clothes Dryers
Room Air
Conditioners
Color T.V.
Dishwashers

Mean Squared Error


MLE
OLS

113.86

95.63

22286.14

16106.10

180.58
444.06
-

136.59
232.00
33.15

42354.81
317979.00
-

28759.00
121496.00
1688.04

estimates consistently provide a better fit to the data. In addition the standard
error generated by the maximum likelihood procedure indicate the general
stability of the estimated parameters.
In order to obtain some sense of the predictive validity of the two estimation approaches, one-step-ahead sales forecasts were generated for clothes
dryers, room air conditioners and color televisions. The fit statistics reported
in Table 3 again indicate the superiority of the maximum likelihood estimates
over those generated using the differential equation model with ordinary least
squares.

1500
1400
1300
1200
1100
1000
900

~
0f

~800

o?~-?

t/
8?
//

_ __
0 ~C-----0

OLS Fitted

,-

700

Actual
MLEFitted

600
500

400 E

/'

300
200
,

100
1949

Year

51

53

55

57

59

61

FIGURE1. Actual, MLE and OLS Fitted Number of Adopters for Clothes Dryers.

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68

DAVID C. SCHMITTLEIN AND VIJAY MAHAJAN

2100
1900
1700
S0
,_

1500

<
o

1300

1100
900
3 G_Q
-----

700

Actual
MtE FITTED
OLS FITTED

500

Year
61

59

57

55

53

51

1949

FIGURE2. Actual, MLE and OLS Fitted Number of Adopters for Room Air Conditioners.

7000
6500

ur

L'i
w

ca
n
LA.
0

Q:

-O

tY

LUi
co

.---_
j-__

Actual
MLEFITTED
OLS FITTED

Year
1963

64

65

66

67

68

69

70

FIGURE3. Actual, MLE and OLS Fitted Number of Adopters for Color Televisions.

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69

INNOVATION DIFFUSION MODEL OF NEW PRODUCT ACCEPTANCE

600

/,

500 -

--->O

Actual

O-- -_

MLEFitted

/0

400 -

X
o

200

100

FIGURE4.

4.2

53

51

1949

,,

55

Year
57

59

61

Actual and MLE Fitted Number of Adopters for Dishwashers.

Medical Innovations

The maximum likelihood and ordinary least squares parameter estimates for
the four products analyzed are summarized in Table 4, with fit statistics given
in Table 5. The actual and fitted adoption estimates are plotted in Figures
5-8. Some important comments on these results follow:
* For Ultrasound and Mammography, the OLS procedure yielded a negative sign for the regression coefficient a&l.As equation (4) indicates, a negative
sign for regression a&would give a negative sign for either p or m.
TABLE 3

Product
Clothes Dryers
Room Air
Conditioners
Color T.V.

One-Step-Ahead Forecast Performance


Forecast Mean Absolute Deviation
Mean Squared Error
Period
OLS
MLE
OLS
MLE
1955-1960
1956-1960
1969-1972

544.62*
589.29
3211.23

284.97

464299.00*

135904.00

426.47
2559.93

538381.00
11,664,233

245072.00
8,529,629

*The OLS procedure yielded inappropriate signs for the regression coefficients for the
period 1949-1955.

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70

DAVID C. SCHMITTLEIN AND VIJAY MAHAJAN

TABLE 4
Parameter Estimatesfor Medical TechnologicalInnovations*
Maximum Likelihood
q
c
p

Product
Ultrasound
CT Head Scanner
CT Body Scanner
Mammography

.00618
(.0025 )
.01252
(.00055)
.00988
(.00069)
.00256
(.00008)

.4342
(.0183)
.9875
(.0428)
.9901
(.0689)
.6462
(.0192)

.9377
(.0196)
.5886
(.0391)
.5894
(.0606)
.5942
(.0357)

OLS**
q

.06962

1.19165

.53110

.05719

1.78881

.42967

* For MLEs, numbers in parentheses are approximate standard errors.


**OLS procedure yielded wrong parameter signs for ultrasound and mammography.

TABLE 5
Fit Statisticsfor Medical TechnologicalInnovations
Mean Absolute Deviation Mean Squared Error
OLS
MLE
OLS
MLE

Product
Ultrasound
CT Head Scanner
CT Body Scanner
Mammography

4.43
3.80

2.98
3.81
4.65
1.91

32.16
23.21
-

15.47
21.42
32.34
7.30

* Although the OLS procedure yielded correct parameter signs for Head
Scanner and Body Scanner, the estimates of the parameter c, the ultimate
penetration level, are less than the penetration levels already achieved by these
two products. As mentioned earlier, the survey identified 54.07% adopters of
CT Head Scanner and 46.41% adopters of CT Body Scanner. Both of these
adoption levels are higher than the ultimate penetration levels suggested by
the OLS procedure.
* The maximum likelihood estimates for all the four products possess
correct signs and their values are very plausible. The standard errors suggest
the general stability of these estimates. Furthermore, Table 5 and Figures 5-8
suggest that these estimates provide a good fit to the adoption data.
5.

Sample Size Determination

To further illustrate the application of the sampling properties in ?3,


required sample sizes for forecasting ultimate market penetration are calculated for the four medical innovations. Here, the parameter of interest is c, the
percent market penetration (i.e., m/M). Clearly, a similar analysis could be
carried out separately for p (coefficient of innovation) or q (coefficient of
imitation). In fact, using the estimated covariance matrix, equation (15), the
sample size needed to generate a given joint confidence region (for all three

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71

INNOVATION DIFFUSION MODEL OF NEW PRODUCT ACCEPTANCE

28

25

Actual

0--

Fitted

0- -- o

20

15
w

\\

0-

c-z

10

Year
1965

69

67

FIGURE 5.

71

73

75

79

77

Actual and MLE Fitted Number of Adopters for Ultrasound.

------

Actual

O ---0

Fitted

Year
1972

FIGURE 6.

73

74

75

76

77

78

Actual and MLE Fitted Number of Adopters for CT Head Scanners.

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72

DAVID C. SCHMITTLEIN

40 -

O--o

Actual

0----

Fitted

30-

AND VIJAY MAHAJAN

cc

20
/
/

/e

10 I

75

74

1973

76

'

Year

78

77

FIGURE7. Actual and MLE Fitted Number of Adopters for CT Body Scanners.

25

Actual

0--0
20 -

- ----

Fitted

15

10

Year
1965

67

69

71

73

75

77

79

FIGURE8. Actual and MLE Fitted Number of Adopters for Mammography.

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INNOVATION DIFFUSION MODEL OF NEW PRODUCT ACCEPTANCE

73

parameters simultaneously) could also be determined. Nevertheless, ultimate


market penetration is often a quantity of interest and may be the single most
important forecast obtained.
It must be stressed that the needed sample size will depend on both the true
values of the parameters and on the time intervals chosen for data collection.
Yearly data were obtained for the medical innovations, and the periods
covered were
1965-1978
1972-1978
1973-1978
1965-1978

Ultrasound:
CT Head Scanner:
CT Body Scanner:
Mammography:

With these time intervals and the parameter values in Table 4, sample sizes
needed to forecast c to varying degrees of accuracy are given in Table 6. The
first two columns refer to 95% confidence intervals which are within 5 and 1
percentage points of the true market penetration. The last two columns
perform the same function for 99%confidence intervals.
Although no claims are made for generalizability of these numerical results,
the patterns which emerge in Table 6 are still noteworthy. The nearly tenfold
range in sample size needed across products indicates a great deal of sensitivi'y to the particular characteristics of the diffusion process being modeled.
Thus, the fact that a sample size of 1200 was sufficient for estimating market
penetration to within 5 percent must be taken with a note of caution.
Another interesting result concerns the difficulty of reducing the confidence
interval below 5 percent. Since the standard error declines proportionately
with vM, the number of observations must be increased by a factor of 25 to
narrow the confidence interval from ?5% to ? 1%. For this reason, an
alternative method of reducing the standard error may be considered in some
studies. Generally, lengthening the period of data collection (e.g., from 1978 to
1980) or collecting more frequent observations will also increase the reliability
of the parameter estimates. Repeating the calculations in ?3 for various data
collection schemes (i.e., choices of tl, .. ., t) one can compare the benefits of
each approach with an assessment of the expected costs.
TABLE 6
Sizes
RequiredSample
for Estimating Market Potential
Product

95%Confidence
? 01
?.05

99%Confidence
?.05
?.01

Ultrasound
CT Head Scanner
CT Body Scanner
Mammography

123
491
1179
409

213
847
2036
706

3084
12,275
29,485
10,233

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5324
21,186
50,892
17,662

74

DAVID C. SCHMITTLEIN AND VIJAY MAHAJAN

Conclusions and Summary


This paper has proposed a maximum likelihood approach to estimating the
parameters of an innovation diffusion model suggested by Bass. The currently
utilized models leading to ordinary least squares or non-linear estimation
procedures cause some difficulties in developing the diffusion model parameter estimates. As pointed out by Heeler and Hustad (1980), utilization of the
regression analog of the Bass model, equation (3), provides a justification for
fitting a quadratic time-series sales response function rather than "true"
estimates of the model parametersp, q, and m. Furthermore, in the presence
of few time-series data points and multicollinearity between the variables,
these procedures may yield inappropriate signs for the diffusion parameters,
and raise questions as to their usefulness for model estimation or forecasting.
In recent years, some attempts have been made to develop alternative
approaches to estimate diffusion model parameters. The published examples
include the Bayesian estimation approach suggested by Lilien, Rao and Kalish
(1981) and the feedback approach proposed by Bretschneider and Mahajan
(1980). However, no sampling distribution theory presently exists for the
estimates provided by these models. In contrast, the maximum likelihood
approach outlined in this paper is easy to use and can help one estimate the
product life cycle of a new product from survey data. In addition to providing
confidence regions for the parameters, it can also be used to assess the
efficiency of different data collection and report schemes.
Another criterion for comparing the two approaches, which complements
those presented in ?4, involves the pattern (over time) of deviations between
the fitted and actual number of adopters. As one indicator of this pattern, the
correlations between errors in successive periods were calculated and are given
in Table 7. For the five products where the OLS procedure yielded appropriate parameter estimates, these autocorrelations were always higher (in absolute
value) than the correlations using the MLE's. Thus the maximum likelihood
fitted values are both closer (in terms of average deviations) to the actual
values, and lead to errors which are, in one sense, less systematic than those
from ordinary least squares.
However, the benefits of the MLE approach are not obtained without cost.
As noted in ?2, once the parameters are chosen (and, hence, the expected
shape of the adoption curve is set) individual adoption times are taken as
independent draws from that distribution. This may be appropriate for inTABLE 7
CorrelationBetween Errors in Successive Periods
Product
Clothes Dryers
Room Air Conditioners
Color T.V.
CT Head Scanner
CT Body Scanner

OLS
0.264
0.237
0.220
0.175
- 0.42

MLE
0.188
0.122
- 0.078
- 0.089
- 0.076

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INNOVATION DIFFUSION MODEL OF NEW PRODUCT ACCEPTANCE

75

novators or imitators separately, but is surely only an approximation of


behavior for the population as a whole. Thus, at present the choice is between
a model (equation (1)) which more explicitly incorporates word of mouth
effects, but whose (least squares) estimation leaves something to be desired,
and a model (equation (8)) with simpler assumptions about individual behavior, but a more attractive estimation procedure. Though the data sets employed above have been limited in both number and scope, the findings
support use of the latter option, especially for applications where forecasting is
important, and/or when survey data are available.
Appendix
The asymptotic covariance matrix for MLE's (aC,b, c) is
Oaa

ab

Oac

Obb

= V-

bc

(A1)

acc

where the information matrix V is


Vaa

V=

Vab

Vac

Vbb Vbc

(A2)

Vcc

with elements
T

Vaa

M[E

Vab

Vac

McBT[ 1+

2(a

i=1 Ai

(A3)

2Ci]

+ I)E - Di -

=
c-M(a
Vbc=-M(a+

],

(A4)

(A5)

Vbb= M(a + l)

1)

(a+ 1) A +

1))[ Dc

-+
C

FJ

(A6)

(A7)
(A7)
T\

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76

DAVID C. SCHMITTLEIN AND VIJAY MAHAJAN

and

Vcc= M

(A8)

In equations (A3)-(A8), Ai, Bi, Ci, Di, Ei, Fi, GT and HT are determined by
using the following equations expressed in terms of the estimated parameters
a, b, and c.
c 1 - e-bti-

Ai = c 1-

-bt
+ ae -bt1

Bi =

+ ae
)e

_ e-bj

e-2bti(

-b- _,

(AIO)
[1+

j-

e--2bti

-c'

tie

[l+ae-

bt,-

(All)

+ ae-bt

[1

'e~bt*
D.=c C ,-c
[l+ae'1

ae-bt',]

e-2bt,-(

'e

[1 + ae-bt"]

Ei =

el

-bt-i
-c

[1 + ae-b-t]

EC=c

(A9)

']

-,
i(A12)
[ + ae-'1]

2bti

ti- le 2bti_-

bi]3

[ l+ae-bt"-1]3'

(A13)

and
ti2e-t(l

- ae-bt)

[1 +ae-bt]3

-c

ti2_le-bti-(

[1+

ae -bti-)

(A14)

ae-bt-']3

The above equations (A9)-(A14) can be used for i = 1,2, . .., T- 1. For
i= T, however, the same equations can be used by setting the first term in
equation (A9) equal to one, and omitting the first term in equations (A10)-

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INNOVATION DIFFUSION MODEL OF NEW PRODUCT ACCEPTANCE

(A14) for

BT

77

through FT. Finally,

Gr=

l-c

tT le-bt-'(I

- e- -T

[1 + ae-b-']

bt-

3)

(A15)

and

1- ebtT-I
1 -+

aebtT

(A16)

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