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

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  • Félix Muñoz-García

    ()
    (School of Economic Sciences, Washington State University.)

  • Heriberto González Lozano

    ()
    (Department of Economics, University of Pittsburgh.)

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.

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Bibliographic Info

Article provided by Universidad Autonoma de Nuevo Leon, Facultad de Economia in its journal Ensayos Revista de Economia.

Volume (Year): XXVIII (2009)
Issue (Month): 1 (May)
Pages: 61-80

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Handle: RePEc:ere:journl:v:xxviii:y:2009:i:1:p:61-80

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Related research

Keywords: signaling; advertising; separating equilibria; information transmission;

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References

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  1. Epstein, G. S., 1998. "Retail pricing and clearance sales: the multiple product case," Journal of Economics and Business, Elsevier, vol. 50(6), pages 551-563, November.
  2. Manishi Prasad & Peter Wahlqvist & Rich Shikiar & Ya-Chen Tina Shih, 2004. "A," PharmacoEconomics, Springer Healthcare | Adis, vol. 22(4), pages 225-244.
  3. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-54, July/Aug..
  4. Esther Gal-Or, 1989. "Warranties as a Signal of Quality," Canadian Journal of Economics, Canadian Economics Association, vol. 22(1), pages 50-61, February.
  5. Linnemer, Laurent, 2002. "Price and advertising as signals of quality when some consumers are informed," International Journal of Industrial Organization, Elsevier, vol. 20(7), pages 931-947, September.
  6. Cho, In-Koo & Kreps, David M, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 179-221, May.
  7. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
  8. Spence, A Michael, 1973. "Job Market Signaling," The Quarterly Journal of Economics, MIT Press, vol. 87(3), pages 355-74, August.
  9. Edward P. Lazear, 1984. "Retail Pricing and Clearance Sales," NBER Working Papers 1446, National Bureau of Economic Research, Inc.
  10. Horstmann, Ignatius & MacDonald, Glenn, 2003. "Is advertising a signal of product quality? Evidence from the compact disc player market, 1983-1992," International Journal of Industrial Organization, Elsevier, vol. 21(3), pages 317-345, March.
  11. Kyle Bagwell & Michael Riordan, 1988. "High and Declining Prices Signal Product Quality," Discussion Papers 808, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  12. Volker Nocke & Martin Peitz, 2007. "A Theory of Clearance Sales," Economic Journal, Royal Economic Society, vol. 117(522), pages 964-990, 07.
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