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Understanding International Prices: Customers as Capital

  • Lukasz A. Drozd
  • Jaromir B. Nosal
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    The article develops a new theory of pricing to market driven by dynamic frictions of building market shares. Our key innovation is a capital theoretic model of marketing in which relations with customers are valuable. We discipline the introduced friction using data on differences between short-run and long-run price elasticity of international trade flows. We show that the model accounts for several pricing "puzzles" of international macroeconomics. (JEL E13, F14, F31, F41, F44, M31)

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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.1.364
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    Article provided by American Economic Association in its journal American Economic Review.

    Volume (Year): 102 (2012)
    Issue (Month): 1 (February)
    Pages: 364-95

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    Handle: RePEc:aea:aecrev:v:102:y:2012:i:1:p:364-95
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    1. Jonathan Heathcote, 2003. "Financial Globalization and Real Regionalization," Working Papers gueconwpa~03-03-20, Georgetown University, Department of Economics.
    2. Alan C. Stockman & Linda L. Tesar, 1991. "Tastes and technology in a two-country model of the business cycle: explaining international co-movements," Working Paper 9019, Federal Reserve Bank of Cleveland.
    3. Fabio Ghironi & Marc J. Melitz, 2004. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," Boston College Working Papers in Economics 599, Boston College Department of Economics.
    4. V.V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1998. "Can sticky price models generate volatile and persistent real exchange rates?," Staff Report 223, Federal Reserve Bank of Minneapolis.
    5. Alok Johri & Amartya Lahiri, 2006. "Persistent Real Exchange Rates," 2006 Meeting Papers 281, Society for Economic Dynamics.
    6. Marston, Richard C., 1990. "Pricing to market in Japanese manufacturing," Journal of International Economics, Elsevier, vol. 29(3-4), pages 217-236, November.
    7. Kasa, Kenneth, 1992. "Adjustment costs and pricing-to-market theory and evidence," Journal of International Economics, Elsevier, vol. 32(1-2), pages 1-30, February.
    8. Paul Krugman, 1986. "Pricing to Market when the Exchange Rate Changes," NBER Working Papers 1926, National Bureau of Economic Research, Inc.
    9. Bruce A. Blonigen & Wesley W. Wilson, 1999. "Explaining Armington: What Determines Substitutability Between Home and Foreign Goods?," Canadian Journal of Economics, Canadian Economics Association, vol. 32(1), pages 1-21, February.
    10. Basu, Susanto & Fernald, John G, 1997. "Returns to Scale in U.S. Production: Estimates and Implications," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 249-83, April.
    11. Pinelopi K. Goldberg & Michael M. Knetter, 1996. "Goods Prices and Exchange Rates: What Have We Learned?," NBER Working Papers 5862, National Bureau of Economic Research, Inc.
    12. Lapham, Beverly J., 1995. "A dynamic general equilibrium analysis of deviations from the laws of one price," Journal of Economic Dynamics and Control, Elsevier, vol. 19(8), pages 1355-1389, November.
    13. Ravn, Morten O & Schmitt-Grohé, Stephanie & Uribe, Martín, 2007. "Pricing to Habits and the Law of One Price," CEPR Discussion Papers 6030, C.E.P.R. Discussion Papers.
    14. Reinert, Kenneth A. & Roland-Holst, David W., 1992. "Armington elasticities for United States manufacturing sectors," Journal of Policy Modeling, Elsevier, vol. 14(5), pages 631-639, October.
    15. Lukasz A. Drozd & Jaromir B. Nosal, 2008. "Understanding international prices: customers as capital," Staff Report 411, Federal Reserve Bank of Minneapolis.
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