Entry order and pricing over the product cycle: The transition from the 486 to the Pentium processor

Abstract

Using a high frequency data set of advertized prices of personal computers we find that prices of Pentium computers of late entrants into this market segment are higher than the contemporaneous prices of their competitors. This is true even among firms which have the same price premium for their 486 computers, but is more pronounced for high quality firms. Over time, the difference in the Pentium computer prices between the early and late entrants declines to the level of the price gap for their 486 computers. In contrast, the entry prices of the late entrants are lower than the entry prices of the early entrants. These results suggest that entry prices of firms are set to extract short run rents from consumers who have a higher willingness to pay for their brand. They also suggest a rapidly declining price premium for quality over the product cycle. We develop a stylized two-period durable goods duopoly model that formalizes this intuition and which produces results consistent with these empirical regularities. In light of these findings, brand coefficients in hedonic regressions using high frequency data should not be interpreted as capturing unobserved quality only.