Word-of-mouth (WOM) is a puzzling phenomenon. It strongly influences the innovation diffusion process and is responsible for the ‘S' shape of the adoption curve. However, it is not clear how WOM affects demand curves for innovative products and strategic decisions of producers. In this paper, we build an agent-based model of innovation diffusion, which links the opinions of individuals with their market behavior via the concept of reservation prices. Using Monte Carlo simulations and mean-field (semi-)analytical treatment we demonstrate that WOM may have ambiguous consequences and should be taken into account when designing marketing strategies. We show that when reversibility of opinions is allowed, WOM may have either a positive or a negative effect on the adoption process, depending on the model parameters and the level of market prices.

In our model, the innovation diffusion is governed by three processes: individual judgment, social influence (WOM) and advertising. When the effects of WOM on the demand curves are considered, our study indicates that social influence can significantly alter the impact of both adoption difficulty and advertising. The influence is not homogeneous and depends on the level of market prices. WOM associated with high market prices discourages diffusion and hence reduces the positive impact of advertising and strengthens the influence of the adoption difficulty. For low market prices, WOM boosts the diffusion and leads to higher demand. Moreover, it supports the positive response to advertising and weakens the effects of the adoption difficulty. This outcome may be considered as a recommendation for companies selling innovative products. Conditional on the targeted penetration level and the market price, the company should aim either at weakening or strengthening the WOM effect. By doing so, it can increase the demand and increase potential revenues.

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