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Market share and price rigidity

  • Kleshchelski, Isaac
  • Vincent, Nicolas

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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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 56 (2009)
Issue (Month): 3 (April)
Pages: 344-352

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Handle: RePEc:eee:moneco:v:56:y:2009:i:3:p:344-352
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