Estimating diffusion and price elasticity with application to telecommunications

This paper aims to propose a new framework for estimating and forecasting diffusion of high technology products, along with the construction of a price index. Into that context, the “diffusion–price” model is presented, as an innovative concept providing a long term estimation of both price and diffusion elasticity. This corresponds to the bidirectional estimation of the mutual influence of the product’s price over its expected diffusion and vice versa. The discrete parts of the methodology are 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 the “diffusion–price” model for estimating and adjusting the diffusion level and price quantities. The case studies examined, 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 case studies considered correspond to the ADSL technology diffusion in the wider European area.