Product introduction strategies in the age of social media

Abstract

When an incumbent faces a new entrant with superior capabilities, it may preemptively announce (preannounce) its future product to avoid forfeiting users. The traditional focus of preannouncement literature has been on truth-telling and vaporware. In the age of social media, the proliferation of online discussion forums and social network usage leads to the formation of public opinions (signals) that may not be in sync with firm's private information regarding its forthcoming innovation. Further, vigilance by consumers and media outlets induce high ex-post cost on vaporware making it infeasible in such settings. Then, when should firm announce or remain silent in modern settings? Under what conditions should the firm pursue innovation in presence of uncertainties in public signals in addition to its own private information? How does presence of network effects influence the preannouncement strategy of the firm? We find that the incumbent follows a preannouncement strategy (truth-telling or silence) if the public signal associated with it is moderate. Further, network effects has a negative impact on prices and incumbent may innovate only if the entrant's relative ability to leverage network effects is low.