New Product Preannouncement: Phantom Products, Unexpected Cannibalization and the Osborne Effect

43 Pages Posted: 7 Dec 2014

See all articles by Ram C. Rao

Ram C. Rao

The University of Texas at Dallas, Naveen Jindal School of Management

Ozge Turut

Sabanci University

Date Written: December 5, 2014

Abstract

By making new product preannouncements (NPP) firms encourage consumers to postpone purchase and wait for the firms' new product that in turn cannibalizes current sales, both own and competitor's. Profitability of NPP depends on which firm's sales are cannibalized and relative margins on current and future products. A stylized fact, particularly in the tech world, is the unexpected cannibalization of own sales following NPP that can lead to severe financial problems. This has resulted in folk wisdom that firms should never preannounce. Our paper bridges the gap between theory and practice by incorporating the 'phantom product effect' into NPP analysis and demonstrating a plausible reason for the high level of cannibalization of current sales that extant NPP models would find to be unforeseen. We show that: 1. the relative preferences of consumers who do not wait for the new product by postponing their purchase can be dramatically altered by just being exposed to NPP, which can explain the unexpectedly high level of cannibalization of current sales and 2. this effect of NPP on the consumers' relative preferences for existing products results in equilibrium firm behavior that differs from conventional NPP analysis.

Keywords: New Product Preannouncement, Phantom Products; Loss Aversion; Reference Dependent Preferences; Competition; Osborne Effect

JEL Classification: C7, D2, D4, D8, L1, M1, M3

Suggested Citation

Rao, Ram C. and Turut, Ozge, New Product Preannouncement: Phantom Products, Unexpected Cannibalization and the Osborne Effect (December 5, 2014). Available at SSRN: https://ssrn.com/abstract=2534547 or http://dx.doi.org/10.2139/ssrn.2534547

Ram C. Rao (Contact Author)

The University of Texas at Dallas, Naveen Jindal School of Management ( email )

Dallas, TX
United States
972-883-2580 (Phone)
972-883-6727 (Fax)

Ozge Turut

Sabanci University ( email )

Orta Mahalle √úniversite Caddesi 27
Istanbul, Orhanli, 34956 Tuzla 34956
Turkey

Register to save articles to
your library

Register

Paper statistics

Downloads
102
Abstract Views
643
rank
269,351
PlumX Metrics