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Abstract

Estimating the Bass diffusion model often creates a time-interval bias, which leads the OLS approach to overestimate sales at early stages and underestimate sales after the peak. Further, a specification error from omitted variables might raise serial correlations among residuals when marketing actions are not incorporated into the diffusion model. Autocorrelated disturbances may yield unbiased but inefficient estimation, and therefore invalid inference results. This phenomenon warrants a modified approach to estimating the Bass diffusion model. In this paper, the authors propose a modified Bass diffusion model handling autocorrelated disturbances. To validate the new approach, authors applied the method on two different data-sets: CT Scanners in the U.S, and FPD TV sales in Korea. The results showed improved model fit and the validity of the proposed model.

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