Vaporware in a quality differentiation model with preannouncement

Na Li and Patrick Van Cayseele

No 634605, Working Papers of Department of Economics, Leuven from KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven

Abstract: Preannouncements allow computer producers to coordinate their product strategies, in particular the quality choices. This coordination results in vaporware. We develop an extended duopoly model with preannouncements followed by a two-stage quality-price choice game. The results show that preannouncements help symmetric firms achieve asymmetric coordination, and improves the equilibrium payoffs. In addition, software products are distinguished from hardware products, modeled as information goods with negligible marginal cost and a large development cost. Welfare analysis shows that consumer surplus typically decreases following preannouncements by hardware producers, while opposite results hold with software products as long as the lowest quality is over a fair level. Furthermore, we estimate the probability of success in coordination following preannouncements in these two situations. It shows that software producers are more likely to announce the highest quality in the preannouncement stage, leading to a lower probability of success in coordination. When the marginal cost of hardware products is low, the result of the comparison is arbitrary.

Pages: 27
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:ete:ceswps:634605

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