Abstract for: Understanding Innovation Diffusion in the Presence of Supply Constraints and Price Feedback: The Case of the Toyota Prius

Despite the extensive literature examining the diffusion of innovations, few have considered the effect of supply constraints on the diffusion process. Here we extend existing theories of diffusion under supply constraint to capture price dynamics, accounting for both waiting lists in the presence of excess demand, and discounting in the presence of excess supply. The model is tested against the case of the diffusion of the Toyota Prius hybrid-electric vehicle in the United States, quantifying the relative contribution of marketing and word-of-mouth to the development of familiarity with the Prius, and explaining both persistent waiting lists over many years and discounting against the Manufacturer’s Suggested Retail Price (MSRP) in recent times. We find that inclusion of endogenous wait lists and discounting significantly improves model explanatory power and alters the contribution of marketing and word-of-mouth to the diffusion process.