Development of a demand model for the simultaneous estimation of the interaction between a product's diffusion and price: an application to telecommunications

Abstract

The aim of this paper is the introduction of a new framework for demand estimation and forecasting along with a price index construction. The innovative concept developed is the -price model, an alternative long term estimation of price and diffusion elasticity, at the same time. It corresponds to the simultaneous estimation of the mutual influence of the product's price over its expected diffusion and vise versa. The discrete parts of the methodology arc the use of a diffusion model for the initial estimation of diffusion, the construction of a price index function for estimating the pricing mechanism and, finally, the construction of a diffusion-price model for estimating and adjusting the diffusion level and price quantities. The evaluation process whose solution was based on genetic algorithms, revealed remarkable results which can be used for business strategies development, as the pricing policy is able to make diffusion diverge substantially from the initial estimates. The evaluation was performed over the DSL technology and the data correspond to the wider European area.