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Market Share and Price Rigidity

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  • Isaac Kleshchelski
  • Nicolas Vincent

    ()
    (IEA, HEC Montréal)

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    Abstract

    Survey evidence shows that the main reason why .rms keep prices stable is that they are concerned about losing customers or market share. We construct a model in which .rms care about the size of their customer base. Firms and customers form long-term relationships because consumers incur costs to switch sellers. In this environment, .rms view customers as long-lived assets. We use a general equilibrium framework where industries and .rms are buffeted by idiosyncratic marginal cost shocks. We obtain three main results. First, cost pass-through into prices is incomplete. Second, the degree of pass-through is an increasing function of the persistence of cost shocks. Third, there is a non-monotonic relationship between the size of switching costs and the rate of pass-through. In addition, we characterize the heterogenous response across industries to marginal cost shocks. The implications of our model are consistent with empirical evidence.

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    File URL: http://www.hec.ca/iea/cahiers/2008/iea0801_nvincent.pdf
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    Bibliographic Info

    Paper provided by HEC Montréal, Institut d'économie appliquée in its series Cahiers de recherche with number 08-01.

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    Length: 52 pages
    Date of creation: May 2007
    Date of revision:
    Handle: RePEc:iea:carech:0801

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    Postal: Institut d'économie appliquée HEC Montréal 3000, Chemin de la Côte-Sainte-Catherine Montréal, Québec H3T 2A7
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    Related research

    Keywords: Price Rigidity; Market Share; Customer Relations; Real Rigidities.;

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Cited by:
    1. Ricardo J. Caballero & Eduardo M.R.A. Engel, 2007. "Price Stickiness in Ss Models: New Interpretations of Old Results," Cowles Foundation Discussion Papers 1603, Cowles Foundation for Research in Economics, Yale University.
    2. Luís Cabral & Arthur Fishman, 2011. "Business as Usual: A Consumer Search Theory of Sticky Prices and Asymmetric Price Adjustment," Working Papers 2011-01, Department of Economics, Bar-Ilan University.
    3. Ravn, Morten O. & Schmitt-Grohé, Stephanie & Uribe, Martín, 2008. "Incomplete Cost Pass-Through Under Deep Habits," CEPR Discussion Papers 6674, C.E.P.R. Discussion Papers.
    4. David M. Arseneau & Sanjay K. Chugh, 2007. "Bargaining, fairness, and price rigidity in a DSGE environment," International Finance Discussion Papers 900, Board of Governors of the Federal Reserve System (U.S.).
    5. Mathä, Thomas Y. & Pierrard, Olivier, 2009. "Search in the product market and the real business cycle," Working Paper Series 1036, European Central Bank.
    6. David M. Arseneau & Sanjay K. Chugh, 2008. "Optimal fiscal and monetary policy in customer markets," International Finance Discussion Papers 919, Board of Governors of the Federal Reserve System (U.S.).

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