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Market Share and Price Rigidity

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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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  • Isaac Kleshchelski & Nicolas Vincent, 2007. "Market Share and Price Rigidity," Cahiers de recherche 08-01, HEC Montréal, Institut d'économie appliquée.
    • Handle: RePEc:iea:carech:0801
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    More about this item

    Keywords

    Price Rigidity; Market Share; Customer Relations; Real Rigidities.;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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