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Price Setting with Customer Retention

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Author Info

  • Luigi Paciello

    (EIEF and CEPR)

  • Andrea Pozzi

    (EIEF and CEPR)

  • Nicholas Trachter

    (Federal Reserve Bank of Richmond)

Abstract

We study a model where customers face frictions when changing their supplier, generating sluggishness in the firm's customer base. Firms care about retaining customers and this affects their pricing strategy. We characterize optimal pricing in this model and estimate it using data on the evolution of the customer base of a large US retailer. The introduction of customer retention concerns reduces markups, more markedly for less productive firms. We show that our model delivers pro-cyclical markups, as well as heterogeneous pass-through of cost shocks. These results help explaining recent empirical evidence.

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Bibliographic Info

Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 1328.

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Length: 51 pages
Date of creation: 2013
Date of revision: Nov 2013
Handle: RePEc:eie:wpaper:1328

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References

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Cited by:
  1. David Berger & Joseph S. Vavra, 2013. "Volatility and Pass-through," NBER Working Papers 19651, National Bureau of Economic Research, Inc.

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