Cheap Talk Preannouncements: Truth or Vaporware?

Cheap Talk Preannouncements: Truth or Vaporware?

Abstract: New product preannouncements are common in markets like computer software, yet shouldn't consumers ignore them because they cannot be verified? We examine the reasons behind the prevalence and credibility of preannouncements by analyzing the decisions of an incumbent to preannounce a new product. We assume that users of the incumbent's current product incur a switching cost to adopt an entrant's product that offers a significant advantage over the incumbent's product. Only the incumbent knows if the upgraded version of its product will be ready for launch in the subsequent period. The analysis shows that when the switching cost lies within an intermediate range, preannouncements by the incumbent are credible, and the entrant reacts by changing price. In this condition, false preannouncements do not occur. As a result, when switching costs are neither too high nor too low, preannouncements by incumbents effectively persuade current users to wait for an upgrade. In contrast, when switching costs exceed the upper threshold, preannouncements are not credible. Here, vaporware may occur, but consumers have no reason to believe it. We believe that in a majority of situations, switching costs lie in an intermediate range. Hence, when firms compete with successive generations of products, the model explains why non-verifiable preannouncements are a) common, b) believed by consumers, and c) ultimately truthful.

More information on Prof. Dr. Sumitro Banerjee can be found here.

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