“Last-chance” sales: what makes them credible?

Felix Munoz-Garcia and Heriberto González Lozano ()
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Heriberto González Lozano: Department of Economics, University of Pittsburgh.

Ensayos Revista de Economia, 2009, vol. XXVIII, issue 1, 61-80

Abstract: This paper analyzes the firms’ standard practice of announcing clearance or “last-chance” sales, namely advertising that a particular product is not going to be available in the market anymore. In the context of a two-period signaling game, prices and advertising decisions of firms are analyzed. Then, the set of separating and pooling equilibria is characterized, so that the above usual advertising techniques can be better understood as equilibria of this model for certain parameter values. In particular, this paper shows that, when the firm which continues in the business knows that few of their current customers will come back in future periods, the set of separating equilibria shrinks. That is, fewer future prospects induce all types of firms to compete for current consumers, leading to pooling equilibria in which all firms announce a “last-chance” sale, even if some of them know they will remain in the industry next period.

Keywords: signaling; advertising; separating equilibria; information transmission (search for similar items in EconPapers)
JEL-codes: D82 L12 (search for similar items in EconPapers)
Date: 2009
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