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Market share and price rigidity

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  • Kleshchelski, Isaac
  • Vincent, Nicolas

Abstract

Survey evidence shows that the main reason why firms keep prices stable is that they are concerned about losing customers or market share. We construct a general equilibrium model in which firms care about the size of their customer base. Firms and customers form long-term relationships because consumers incur costs to switch sellers. In an environment with sectoral productivity shocks, we show that cost pass-through is a non-monotonic function of the size of switching costs. Specifically, prices tend to become more stable as the fraction of repeat customers increases and the elasticity of the customer base falls.

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  • Kleshchelski, Isaac & Vincent, Nicolas, 2009. "Market share and price rigidity," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 344-352, April.
  • Handle: RePEc:eee:moneco:v:56:y:2009:i:3:p:344-352
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    More about this item

    Keywords

    Price rigidity Market share Customer relations Real rigidities;

    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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