The Strength of Weak Commitments: A Theory of Price Preannouncements

Manufacturers often preannounce reference prices for products that have not yet been produced or even developed. These prices are rarely binding, meaning that the manufacturers can make price adjustments in the future, possibly at a cost. In this paper, we argue that price preannouncements can serve as a weak price commitment that, we find, helps the manufacturers secure better deals from their suppliers, thereby lowering their procurement costs and improving their profit. Surprisingly, even an extremely weak price commitment can substantially improve a manufacturer’s profit. On the other hand, when the price commitment is credible enough, the manufacturer forgoes the price preannouncement. Collectively, these results underscore the strategic effects that price preannouncements can have on firms’ marketing decisions.

This paper was accepted by Dmitry Kuksov, marketing.

Funding: Financial support from the National Natural Science Foundation of China [Grant 72422007] and the Research Grants Council, University Grants Committee [Grants 11502221 and 16501523] is gratefully acknowledged.

Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2023.02020.