Selling Innovative Products in the Presence of Externalities

When deciding whether to adopt an innovative product or service, consumers often experience different levels of anxiety (i.e., nervousness) that prompt them to resist purchase (e.g., fear of learning new technologies, disruption of established habits or beliefs). In such cases, consumers’ anxiety is mitigated by “validation” through externality (e.g., the number of early adopters). To reduce consumers’ anxiety, firms can also invest in “familiarization” through promotion (e.g., offering free trials). We conceptualize innovation as a product that engenders anxiety, and present a model that employs a consumer utility model focusing on the psychological dimension. We examine the firm's profit‐maximizing promotion and pricing decisions when selling to forward‐looking consumers in the presence of externality. Our equilibrium analysis reveals that, unlike the conventional wisdom for promoting new products, for anxiety‐inducing innovations with externality, accelerating the speed of adoption through promotion can actually be detrimental to the firm.