New Products, Upgrades, and New Releases: A Rationale for Sequential Product Introduction

Network externality is an important consideration in many high-technology product markets. In these markets, consumers’ expectations about the future installed base and the resultant externality benefits play a critical role in their product adoption decisions. The authors investigate the strategic implications of consumer uncertainty regarding network externality and show that a firm can credibly convey private information about future installed base through its new product introduction strategy. The authors initially consider a market in which consumers are homogeneous in their valuation of quality. They show that under complete information the optimal strategy entails provision of full (efficient) quality in the first period itself, providing any upgrade in the second period is suboptimal. However, under asymmetric information about externality, a high-externality firm provides less than full quality initially and then makes up for the quality differential through provision of an upgrade in the second period. Thus, underprovision of introductory quality (i.e., withholding quality) serves as a signal of high externality, and upgrades serve as the mechanism for implementation of the signaling strategy. The authors demonstrate the robustness of this result by extending the model to incorporate consumer heterogeneity in quality valuation. The additional insight here is that signaling entails sequential targeting of segments in addition to sequential provision of quality.