Abstract Osborne Effect

New Product Preannouncement: Phantom Products, Unexpected

Cannibalization and the Osborne Effect

 

Ram C Rao and Ozge Turut

April 2016

Abstract

 

By making new product preannouncements (NPP) Firms encourage consumers to postpone purchase and wait for the firm’s 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 (i.e., the Osborne Effect) that extant NPP models would find to be unforeseen. We show that: 1. mere exposure to NPP can dramatically affect the relative preferences of consumers, even if they choose not to postpone their purchase, and that, in turn, can explain the stylized observation of NPP leading to unexpectedly high level of cannibalization of current sales; 2. managers should depart from conventional NPP analysis when they tailor their competitive strategies in equilibrium keeping in mind the interaction of NPP and consumers’ relative preferences for existing products.

 

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

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