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Interactions Between Price Setting and Capital Investment in a Customer Market

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  • Bucht, Charlotte

    (Ministry of Finance)

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    Abstract

    In this essay a customer market model is constructed, where an entrepreneur-owned firm has two choice variables, namely the customer stock and the capital stock. The firm is assumed to be completely credit rationed and the investment procedure is characterised by time-to-build. The model is solved numerically to yield steady state paths for the ratio of customers to capital, investments and price. A comparative statics analysis is carried out so as to find out how price and investments respond to exogenous shocks. The model is also tested empirically with data for the Swedish manufacturing sector. The results from the theoretical model point to a close relationship between price setting and investment decisions, which is then confirmed by the empirical investigation.

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    Bibliographic Info

    Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 1997:27.

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    Length: 50 pages
    Date of creation: 15 Oct 1997
    Date of revision:
    Handle: RePEc:hhs:uunewp:1997_027

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    Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
    Phone: + 46 18 471 25 00
    Fax: + 46 18 471 14 78
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    Web page: http://www.nek.uu.se/
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    Keywords: Price Setting; Customer Markets; Investments;

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