Adoption of Innovations: Comparing the Imitation and the Threshold Models

This monograph introduces and compares the two leading frameworks for analyzing the adoption and diffusion of innovations - the imitation and threshold models. Imitation models perceive the diffusion process as being driven primarily by communication, whether initiated by the firm or between existing and potential customers, and are particularly useful when aggregate data is available, and allows the incorporation of some economic variables. By contrast, the threshold model emphasizes individual micro-economic decision making and explains the differences in the timing of adoption by heterogeneity among individuals or firms while the dynamic processes of learning affect costs as well as perceptions of value that drive the diffusion process. The threshold model provides a foundation to use cross section and panel data to estimate factors that affect differences in adoption patterns including size, wealth, education, and attitude towards risk. We show how to incorporate multiple marketing tools into both models. We find that the threshold model affords a more refined consideration of risk to optimize the choice of marketing tools because the threshold model can explicitly incorporate various economic frameworks such as expected utility, loss aversion and disappointment models, the safety-rule approach, and real-option theory. We illustrate how to manage marketing risk reduction tools in this context, including money back guarantees and demonstrations. Our review suggests that the two models should be treated as complementary models rather than as substitutes for each other. Our analysis expands on the analysis and design of marketing tools in promoting diffusion and discusses how to enhance their relevance and effectiveness. It also provides a bridge between marketing tools and the economic analysis of diffusion.