Innovation Diffusion Among Case‐Based Decision‐Makers

ABSTRACT This paper analyzes a model of innovation diffusion with case‐based individuals a la Gilboa and Schmeidler, who decide whether to consume an incumbent or a new product based on their and their social neighbors' previous consumption experiences. I analyze how diffusion patterns change with individual characteristics, innovation characteristics, and social networks. In particular, information about a superior innovation could be overwhelmed by information about the incumbent product, leading to inefficient asymptotic diffusion. Radical innovation or innovation with a strong R&D focus leads to higher initial speed but lower acceleration than incremental innovation or innovation with a strong marketing effort. Social networks with stronger overall social ties, lower degrees of homophily, or higher exposure to reviews from early adopters speed up the diffusion of innovation.