7. Conclusion
In this paper, we investigate the competitive effects of new product preannouncement and retaliatory preannouncement in a model where firms compete on advertising and pricing. A key finding is that NPP can relax competition and firms with different advertising costs have different attitudes toward NPP. Another important finding is that firms with different advertising costs react differently (making retaliation versus keeping inaction) in the presence of NPP. When NPP and reaction to NPP are endogenously decided, we find that NPP is good for the high-cost firm, is bad for customers, and may be good or bad for the low-cost firm as well as the total welfare. Our findings rule out the conventional rationales for the use of NPP such as the benefits of market preemption, entry deterrence, brand loyalty, and word-of-mouth. Factually, our model can be extended to contain some of the rationales. For instance, we may assume that NPP creates brand loyalty with a degree of α, which means that fully informed consumers will patronize the preannouncing firm, say, firm i, as long as pi − pj < α. Alternatively, we may assume that NPP gives rise to an intensity β of information communication among customers, which means that at the product launch time, there will be a φi + (1 − φi)β proportion of consumers who know of the preannouncing firm. Under these assumptions, we find that firms are more willing to introduce NPPs with the increase of α or β. 6 These results conform to the conventional rationales.
