Announcement, Entry, and Preemption When Consumers Have Switching Costs

Heiko Gerlach

RAND Journal of Economics, 2004, vol. 35, issue 1, 184-202

Abstract: I study the incentives of innovating firms to announce their entry in markets in which consumers incur a cost of switching from one product to another. Announcing entry can prevent the lock-in of potential demand before the launch of the new product. At the same time, however, the incumbent firm learns about the impending entry and has the opportunity to cut prices and preempt the market. In equilibrium, entrants do not always announce, and I show that this behavior maximizes ex ante total welfare. By contrast, consumers might be better off with a ban on announcements. When the entrant's claims are not verifiable, vaporware announcements arise in equilibrium, and I demonstrate that they can be beneficial for consumers.

Date: 2004
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