As has been pointed out above, the knowledge of a new edition being readied can kill the current edition. That's also fairly well understood.
For the case of 1E -> 2E AD&D, I'm not quite sure that the market completely "fell off a cliff" like what happened for 3.5E -> 4E after August 2007.
Back in the late 1980's, I didn't even know there was a 2E AD&D being made until I saw it in a bookstore in 1989. Though in those days, I didn't regularly read Dragon Magazine and most of my friends didn't either.
If one examines what 1E AD&D products were released in 1987 and 1988, some were relatively popular such as:
- Forgotten Realms setting "grey box"
- Manual of the Planes
- Dragonlance Adventures (hardcover)
For the BECMI D&D box sets, around ten modules were released during 1987.
For 1988, I probably will agree that the product lineup was somewhat on the lackluster side for both 1E AD&D and BECMI.
The only explanation I can think of as to why 1E AD&D and BECMI didn't completely fall off a cliff shortly after the announcement of 2E AD&D in Dragon Magazine (#117) in January 1987, was that the information didn't spread as quickly compared to today. Today with information spreading really quickly on the internet, I wouldn't be surprised if even casual players heard about the 4E announcement in August 2007 or shortly thereafter.