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Customer Relationship and Sales

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  • Shouyong Shi

Abstract

I construct a search model to formalize the intuitive idea that sellers hold sales to attract buyers and build customer relationships. The market consists of a large number of buyers and sellers. All sellers sell a homogeneous good and all buyers have the same publicly known valuation of the good. Buyers know the terms of trade offered by sellers before choosing which seller to visit. A buyer is related to a seller if the buyer just bought a good from the seller and the relationship is broken if the buyer fails to continue to buy from the seller. Sellers are restricted to offer the same price to all buyers, but they are allowed to give priority to their related buyers. I prove that there is an equilibrium in which a seller gives priority to the related buyer and a buyer makes repeat purchases from the related seller. In the equilibrium, a seller who does not have a related buyer posts a low (sale) price to attract the buyers who are unrelated to any seller and, once the seller is related to a buyer after a trade, the seller will post a high (regular) price to sell only to the related buyer. The fraction of related sellers is endogenous in the equilibrium. I calibrate the steady state of the model to the data and find that the sale price represents a sizable markdown, and the regular price a sizable markup, on the marginal cost. With the calibrated model, I examine comparative statics and dynamics of the equilibrium with respect to changes in the cost of and the demand for the good.

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Bibliographic Info

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-429.

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Length: 49 pages
Date of creation: 11 May 2011
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-429

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Keywords: Sales; Customer relationship; Directed search;

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References

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  1. Shi, Shouyong, 2002. "A Directed Search Model of Inequality with Heterogeneous Skills and Skill-Based Technology," Review of Economic Studies, Wiley Blackwell, vol. 69(2), pages 467-91, April.
  2. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1415-1464, November.
  3. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
  4. Judith A. Chevalier & Anil K. Kashyap & Peter E. Rossi, 2003. "Why Don't Prices Rise During Periods of Peak Demand? Evidence from Scanner Data," American Economic Review, American Economic Association, vol. 93(1), pages 15-37, March.
  5. Peter J. Klenow & Oleksiy Kryvtsov, 2007. "State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation?," Discussion Papers 07-007, Stanford Institute for Economic Policy Research.
  6. Shouyong Shi, 2006. "Directed Search for Equilibrium Wage-Tenure Contracts," Working Papers tecipa-260, University of Toronto, Department of Economics.
  7. Salop, S & Stiglitz, J E, 1982. "The Theory of Sales: A Simple Model of Equilibrium Price Dispersion with Identical Agents," American Economic Review, American Economic Association, vol. 72(5), pages 1121-30, December.
  8. Shilony, Yuval, 1977. "Mixed pricing in oligopoly," Journal of Economic Theory, Elsevier, vol. 14(2), pages 373-388, April.
  9. Shantanu Dutta & Mark Bergen & Daniel Levy, 2002. "Price Flexibility in Channels of Distribution: Evidence from Scanner Data," Working Papers 2002-10, Department of Economics, Bar-Ilan University.
  10. Shouyong Shi & Francisco Gonzalez, 2009. "An Equilibrium Theory of Learning, Search and Wages," 2009 Meeting Papers 27, Society for Economic Dynamics.
  11. Galenianos, Manolis & Kircher, Philipp, 2009. "Directed search with multiple job applications," Journal of Economic Theory, Elsevier, vol. 144(2), pages 445-471, March.
  12. Kyle Bagwell, 1987. "Introductory Price as a Signal of Cost in a Model of Repeat Business," Discussion Papers 722, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  13. Robert Shimer, 2001. "The Assignment of Workers to Jobs In an Economy with Coordination Frictions," NBER Working Papers 8501, National Bureau of Economic Research, Inc.
  14. Peters, Michael, 1984. "Bertrand Equilibrium with Capacity Constraints and Restricted Mobility," Econometrica, Econometric Society, vol. 52(5), pages 1117-27, September.
  15. Martin Pesendorfer, 2002. "Retail Sales: A Study of Pricing Behavior in Supermarkets," The Journal of Business, University of Chicago Press, vol. 75(1), pages 33-66, January.
  16. Montgomery, James D, 1991. "Equilibrium Wage Dispersion and Interindustry Wage Differentials," The Quarterly Journal of Economics, MIT Press, vol. 106(1), pages 163-79, February.
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Cited by:
  1. Emmanuel Saez & Pascal Michaillat, 2013. "A Theory of Aggregate Supply and Aggregate Demand as Functions of Market Tightness with Prices as Parameters," 2013 Meeting Papers 1216, Society for Economic Dynamics.

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