Pricing Over the Product Cycle : The Transition from the 486 to the Pentium Processor

Using a high frequency data-set of advertised prices in the personal computer industry, we find that firms which introduced Pentium computers late in the "buy Direct" segment of the market command a higher price premium compared to early entrants. 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 price premia of the late versus the early entrants decline to levels of the difference in the corresponding 486 price premia. The decline in the relative Pentium price premia contributes to a decline in overall price dispersion, while price dispersion for 486 computers remains constant. These results suggest that late entrants reap short run rents from these consumers that are loyal enough to them to have waited until their entry in order to purchase. They also suggest a rapidly declining price premium for quality over the product cycle. In light of these findings, brand coefficients in hedonistic regressions using high frequency data should not be interpreted as capturing unobserved quality only