The Market Evolution and Sales Take-Off of Product Innovations

Rajshree Agarwal
Department of Business Administration
University of Illinois at Urbana-Champaign
350 Wohlers Hall, 1206 S. Sixth Street
Champaign, IL 61822
Voice: (217) 265-5513
Fax: (217) 244-7969
agarwalr@uiuc.edu

Barry L. Bayus
Kenan-Flagler Business School
University of North Carolina
CB 3490
Chapel Hill, NC 27599
Voice: (919) 962-3210
Fax: (919) 962-7186
Barry_Bayus@UNC.edu 

 

Abstract

In contrast to the prevailing supply-side explanation that price decreases are the key driver of a sales take-off, we argue that outward shifting supply and demand curves lead to market take-off.  Our fundamental idea is that sales in new markets are initially low since the first commercialized forms of new innovations are primitive. Then, as new firms enter, actual and perceived product quality improves (and prices possibly drop) which leads to a take-off in sales. To provide empirical evidence for this explanation, we explore the relationship between take-off times, price decreases, and firm entry for a sample of consumer and industrial product innovations commercialized in the US over the past 150 years.  Based on a proportional hazards analysis of take-off times, we find that new firm entry dominates other factors in explaining observed sales take-off times.  We also find no evidence that price mediates the relationship between firm entry and take-off time.  We interpret these results as supporting the idea that demand shifts during the early evolution of a new market due to non-price factors is the key driver of a sales take-off.

 

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