CREDIBLE SIGNALS OF THE RELEASE OF NEW VERSIONS

I. INTRODUCTION Many products are marketed some time after they have been developed. For instance, a new smartphone may be developed and tested well before it is available for purchase. A new car might be prototyped and driven months before it comes to the market. Indeed, a firm will often have several products concurrently in a development "pipeline"; consumers may know a product is in that pipeline without knowing its progress towards the market. Because the outcome of such development and testing is not visible to outsiders, the firm knows whether it can market a product before consumers do. Consumers are uninformed about when, and if, the new product will be marketed to them. Economists have long recognized that the present demand for durable goods depends on future prospects, such as the future price or the introduction of an improved version. (1) The existence of such an improved version is often the seller's private information. If consumers anticipate a new version, some will defer purchases until the new version is available, and the seller will face low demand for the present version. Disclosing the new version is not in a monopoly seller's interest. A seller whose good does not have a new version would also like to communicate that fact to consumers. While a firm with a successful product innovation can credibly disclose the new version with relative ease, a firm that has failed to develop a new product could have great difficulty convincing consumers that the product has no new version. In such situations, it is important to examine whether prices can inform consumers whether a new version will be marketed in the near future. In a recent paper, Choi et al. (2010) developed a model with a risky product development process in which reputation effects allow cheap-talk announcements to signal successful product development to consumers. An announcement induces consumers to delay or divert purchases to the announcer's coming product, which increases the announcer's profit and can improve welfare. (2) In their model, the announcer and her non-innovative rivals supply the original good competitively. Because of this, an announcement does not reduce profit on the current version. This paper will focus on markets where the seller has substantial market power before innovating, so announcing a successful product development has a cost in terms of current revenue. Further, because we attend to prices as signals, this model may also apply to markets where a long-run relationship between consumers and firms may not be sustainable. Another objective of this paper is to examine the welfare effects of mandatory disclosure. A government policy mandating disclosure of any new version is an alternative means of informing consumers. (3) As long as firms are not willing to lie to the government, such a policy would credibly communicate whether a new version of a durable is coming. Mandatory disclosure would bring about full information as consumers are informed about any improved future version before observing the price of the current version. In this paper, we explore a two-period model of a durable-good monopoly in which consumers are initially uninformed about whether there will be a new version of the current good. The monopoly seller is privately informed if he will be able to market an improved version in the second period. In the first period, consumers must decide whether to purchase the good now or wait for an upgraded version. They may be able to infer from the price of the current version whether the seller will bring a new version to the market. It is important to see, first, whether prices can serve as signals and, second, how welfare compares between any signaling outcome and a full-information benchmark corresponding to mandatory disclosure. We will show that there is a unique equilibrium supported by "intuitive" beliefs; in this equilibrium, the seller's private information about an improved version is completely revealed to consumers. …