Vaporware, suddenware, and trueware: new product preannouncements under market uncertainty
Ofek , Elie and Turut, Özge (2012) Vaporware, suddenware, and trueware: new product preannouncements under market uncertainty. (Accepted/In Press)
A firm may want to preannounce its plans to develop a new product in order to stimulate future demand. But given that such communications can affect rivals’ incentives to develop the same new product, a firm may decide to preannounce untruthfully in order to deter competitors. We examine an incumbent’s preannouncement strategy when there is uncertainty regarding the commercial viability of a new product opportunity and a threat of rival entry. Each firm has a private assessment of the market potential for the new product and two competitive incentives arise for the incumbent: it can discourage entry through preemptive communication or by remaining silent and instilling a pessimistic market potential outlook. We find that an incumbent prefers to follow a vaporware strategy— i.e., declare plans to pursue the new product opportunity even when it may have no development intentions— when its market forecasting capabilities are weak and the demand-side benefits from preannouncing are small. By contrast, when the incumbent has strong market forecasting capabilities and the demand-side benefits are small, the incumbent adopts a suddenware strategy— i.e., remains silent about its new product plans even when it actually plans to develop the new product. Finally, when its market forecasting capabilities are strong and the demand-side benefits are large the incumbent prefers to engage in a trueware strategy— i.e., truthfully preannounce development plans. We show that an interplay between competitive-related and demand-related considerations is what allows trueware to emerge as an equilibrium in the absence of any ex-post cost to engaging in vaporware. In an extension, we let the incumbent’s actual development plans leak out and allow the entrant to wait and learn these plans prior to setting an R&D level. We identify conditions for the entrant to postpone development despite the risk of being late to market, and conditions for the entrant to commence development immediately despite not knowing what the incumbent is up to based on the preannouncement observed.
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