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Understanding International Prices: Customers as Capital

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  • Lukasz A. Drozd
  • Jaromir B. Nosal
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    Abstract

    The article develops a new theory of pricing to market driven by dynamic frictions of building market shares. Our key innovation is a capital theoretic model of marketing in which relations with customers are valuable. We discipline the introduced friction using data on differences between short-run and long-run price elasticity of international trade flows. We show that the model accounts for several pricing "puzzles" of international macroeconomics. (JEL E13, F14, F31, F41, F44, M31)

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    Bibliographic Info

    Article provided by American Economic Association in its journal American Economic Review.

    Volume (Year): 102 (2012)
    Issue (Month): 1 (February)
    Pages: 364-95

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    Handle: RePEc:aea:aecrev:v:102:y:2012:i:1:p:364-95

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    References

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    1. Fabio Ghironi & Marc Melitz, 2004. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," 2004 Meeting Papers 451, Society for Economic Dynamics.
    2. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1243-1272, September.
    3. Morten O. Ravn & Stephanie Schmitt-Grohé & Martín Uribe, 2007. "Pricing to Habits and the Law of One Price," American Economic Review, American Economic Association, vol. 97(2), pages 232-238, May.
    4. Kasa, Kenneth, 1992. "Adjustment costs and pricing-to-market theory and evidence," Journal of International Economics, Elsevier, vol. 32(1-2), pages 1-30, February.
    5. Johri, Alok & Lahiri, Amartya, 2008. "Persistent real exchange rates," Journal of International Economics, Elsevier, vol. 76(2), pages 223-236, December.
    6. Beverly J. Lapham, 1990. "A Dynamic, General Equilibrium Analysis of Deviations From the Laws of One Price," Working Papers 793, Queen's University, Department of Economics.
    7. Lukasz A. Drozd & Jaromir B. Nosal, 2008. "Understanding international prices: customers as capital," Staff Report 411, Federal Reserve Bank of Minneapolis.
    8. Bruce A. Blonigen & Wesley W. Wilson, 1999. "Explaining Armington: What Determines Substitutability Between Home and Foreign Goods?," Canadian Journal of Economics, Canadian Economics Association, vol. 32(1), pages 1-21, February.
    9. V.V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1998. "Can sticky price models generate volatile and persistent real exchange rates?," Staff Report 223, Federal Reserve Bank of Minneapolis.
    10. Susanto Basu & John G. Fernald, 1996. "Returns to scale in U.S. production: estimates and implications," International Finance Discussion Papers 546, Board of Governors of the Federal Reserve System (U.S.).
    11. Marston, Richard C., 1990. "Pricing to market in Japanese manufacturing," Journal of International Economics, Elsevier, vol. 29(3-4), pages 217-236, November.
    12. Reinert, Kenneth A. & Roland-Holst, David W., 1992. "Armington elasticities for United States manufacturing sectors," Journal of Policy Modeling, Elsevier, vol. 14(5), pages 631-639, October.
    13. Heathcote, Jonathan & Perri, Fabrizio, 2004. "Financial globalization and real regionalization," Journal of Economic Theory, Elsevier, vol. 119(1), pages 207-243, November.
    14. Paul Krugman, 1986. "Pricing to Market when the Exchange Rate Changes," NBER Working Papers 1926, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Mario J. Crucini & J. Scott Davis, 2013. "Distribution capital and the short- and long-run import demand elasticity," Globalization and Monetary Policy Institute Working Paper 137, Federal Reserve Bank of Dallas.
    2. Doireann Fitzgerald & Stefanie Haller, 2014. "Exporters and Shocks: Dissecting the International Elasticity Puzzle," Working Papers 201408, School Of Economics, University College Dublin.
    3. Nicholas Trachter & Andrea Pozzi & Luigi Paciello, 2014. "Markups Dynamics with Customer Markets," 2014 Meeting Papers 39, Society for Economic Dynamics.
    4. King, Philip & Millard, Stephen, 2014. "Modelling the service sector," Bank of England working papers 500, Bank of England.
    5. George Alessandria & Sangeeta Pratap & Vivian Yue, 2013. "Export dynamics in large devaluations," Working Papers 13-33, Federal Reserve Bank of Philadelphia.
    6. Ryan Monarch, 2014. ""It'S Not You, It'S Me": Breakups In U.S.-China Trade Relationships," Working Papers 14-08, Center for Economic Studies, U.S. Census Bureau.
    7. Luigi Paciello & Andrea Pozzi & Nicholas Trachter, 2013. "Price Setting with Customer Retention," EIEF Working Papers Series 1328, Einaudi Institute for Economics and Finance (EIEF), revised Nov 2013.
    8. Volker Tjaden, 2013. "Foreign Customer Accumulation and Export Dynamics," Bonn Econ Discussion Papers bgse06_2013, University of Bonn, Germany.
    9. Philip King & Stephen Millard, 2014. "Modelling the service sector," Discussion Papers 1401, Centre for Macroeconomics (CFM).
    10. Michael Bleaney & Mo Tian, . "Exchange Rates and Trade Balance Adjustment:A Multi-Country Empirical Analysis," Discussion Papers 12/10, University of Nottingham, CREDIT.
    11. Ariel Burstein & Gita Gopinath, 2013. "International Prices and Exchange Rates," NBER Working Papers 18829, National Bureau of Economic Research, Inc.
    12. Strasser, Georg, 2013. "Exchange rate pass-through and credit constraints," Journal of Monetary Economics, Elsevier, vol. 60(1), pages 25-38.

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