Optimal 'Last-Minute' Selling by a Monopolist Facing Forward-Looking and Risk Averse Consumers

Abstract

We characterize profit-maximizing strategies for a monopolist who sells to risk-averse buyers in two time periods and may deliberately randomize the occurrence of clearance sales. Our theoretical investigation shows that such a randomized strategy is optimal whenever the seller’s capacity exceeds a threshold value that is a decreasing function of the degree of the buyers’ risk-aversion. We show that with no loss of optimality the seller can restrict herself to strategies with a deterministic “sale” price. Contrary to intuition, we find that an increase in the buyers’ risk-aversion shifts supply toward randomized “last-minute” selling.