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Market share and price rigidity

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  • Kleshchelski, Isaac
  • Vincent, Nicolas
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    Abstract

    Survey evidence shows that the main reason why firms keep prices stable is that they are concerned about losing customers or market share. We construct a general equilibrium model in which firms care about the size of their customer base. Firms and customers form long-term relationships because consumers incur costs to switch sellers. In an environment with sectoral productivity shocks, we show that cost pass-through is a non-monotonic function of the size of switching costs. Specifically, prices tend to become more stable as the fraction of repeat customers increases and the elasticity of the customer base falls.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Monetary Economics.

    Volume (Year): 56 (2009)
    Issue (Month): 3 (April)
    Pages: 344-352

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    Handle: RePEc:eee:moneco:v:56:y:2009:i:3:p:344-352

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    Web page: http://www.elsevier.com/locate/inca/505566

    Related research

    Keywords: Price rigidity Market share Customer relations Real rigidities;

    References

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    Citations

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    Cited by:
    1. Nakamura, Emi & Steinsson, Jón, 2011. "Price setting in forward-looking customer markets," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 220-233.
    2. 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.
    3. Francois Gourio & Leena Rudanko, 2011. "Customer Capital," NBER Working Papers 17191, National Bureau of Economic Research, Inc.
    4. Nicolas Vincent, 2012. "Price Stickiness in Customer Markets with Reference Prices," Cahiers de recherche 1230, CIRPEE.
    5. 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.
    6. Gust, Christopher & Leduc, Sylvain & Vigfusson, Robert, 2010. "Trade integration, competition, and the decline in exchange-rate pass-through," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 309-324, April.
    7. Mirko Abbritti, 2012. "Product Market Frictions, Bargaining and Pass-Through," Faculty Working Papers 19/12, School of Economics and Business Administration, University of Navarra.
    8. Söderberg, Johan, 2011. "Customer markets and the welfare effects of monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 206-219.

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