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Customer relationship and sales

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  • Shi, Shouyong

Abstract

In a large market where sellers post the terms of trade to direct search, I prove that customer relationships arise endogenously in the equilibrium as buyers make repeat purchases and sellers give priority to repeat trades. When the buyer–seller ratio is low, the equilibrium is separating between related and unrelated individuals. When the buyer–seller ratio is high, the equilibrium is partially mixing because a newly related seller attracts both the related buyer and unrelated buyers. Customer relationships improve welfare by reducing coordination frictions and helping sellers learn about the related buyer's utility. However, an equilibrium is constrained efficient only when it is separating and when the buyer–seller ratio is low. Moreover, customer relationships induce microprice dynamics, including sales, even when market conditions are constant. I examine how market conditions affect markups, the frequency and the sale duration, both analytically and in a calibrated example.

Suggested Citation

  • Shi, Shouyong, 2016. "Customer relationship and sales," Journal of Economic Theory, Elsevier, vol. 166(C), pages 483-516.
  • Handle: RePEc:eee:jetheo:v:166:y:2016:i:c:p:483-516
    DOI: 10.1016/j.jet.2016.09.012
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    More about this item

    Keywords

    Customer relationship; Sales; Directed search; Learning;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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