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Forecasting the diffusion of innovation: A stochastic bass model with log-normal and mean-reverting error process

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Details

Original languageEnglish
Pages (from-to)1-22
Number of pages22
JournalIEEE Transactions on Engineering Management
Volume99
DOIs
Publication statusPublished - 2011
Publication typeA1 Journal article-refereed

Abstract

Forecasting the diffusion of innovations plays a major role in managing technology development and in engineering management overall. In this paper, we extend the conventional Bass model stochastically by specifying the error process of sales as log-normal and mean-reverting. Our model satisfies the following reasonable properties, which are generally ignored in the existing literature: sales cannot be negative, the error process can have a memory, and sales fluctuate more when they are high and less when they are low. The conventional and widely used model that assumes normally distributed error term does not have these properties. We address how to forecast properly under the log-normal and mean-reverting error process, and show analytically and numerically that in our extended model sales forecasts can substantially alter conventional Bass forecasts. We also analyze the model empirically, showing that our extension can improve the accuracy of future sales forecasts.

Publication forum classification

Field of science, Statistics Finland

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