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

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.