Innovation Preannouncement and Entry in a Vertically Differentiated Industry

Abstract

When considering the preannouncement of the market introduction of a newly developed, durable good, an innovative firm faces a trade-off. By announcing early, the firm can prevent the loss of potential demand before the launch of its product. At the same time, the incumbent firm learns about the market introduction and has the opportunity to take preemptive actions against the innovative firm. This analysis shows under which industry conditions an innovative firm can be expected to preannounce its product launch into a vertically differentiated industry. Welfare considerations indicate that consumers would not necessarily be better off if the information about future product generations would be common knowledge and that there might even be situations in which they would prefer product preannouncements to be banned completely.