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Countercyclical Pricing in Customer Markets

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  • Kyle Bagwell

Abstract

I present a dynamic model of price determination in customer markets that are subject to exogenous business cycle fluctuations. The business cycle is described in terms of a Markov process, in which market demand alternates stochastically between fast growth (boom) and slow growth (recession) phases. In the consumers' preferred equilibrium outcome, ( 1 ) prices are below the monopoly level, and ( 2 ) prices are countercyclical when demand growth rates are positively correlated through time. A firm faces a dynamic trade-off when making its current price selection. While a higher price may raise a firm's profit in the short term, it also may diminish the firm's reputation for low prices, leading to lower profits in the future. Copyright (c) The London School of Economics and Political Science 2004.

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  • Kyle Bagwell, 2004. "Countercyclical Pricing in Customer Markets," Economica, London School of Economics and Political Science, vol. 71(284), pages 519-542, November.
  • Handle: RePEc:bla:econom:v:71:y:2004:i:284:p:519-542
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    Cited by:

    1. Simon Gilchrist & Raphael Schoenle & Jae Sim & Egon Zakrajšek, 2017. "Inflation Dynamics during the Financial Crisis," American Economic Review, American Economic Association, vol. 107(3), pages 785-823, March.
    2. Nakamura, Emi & Steinsson, Jón, 2011. "Price setting in forward-looking customer markets," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 220-233.
    3. Ali Choudhary & Thorlakur Karlsson & Gylfi Zoega, 2009. "Survey Evidence on Customer Markets," Birkbeck Working Papers in Economics and Finance 0916, Birkbeck, Department of Economics, Mathematics & Statistics.
    4. Emi Nakamura & Jon Steinsson, 2005. "Price Setting in a Forward-Looking Customer Market," Macroeconomics 0509010, EconWPA.

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