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Firm dynamics and pricing under customer capital accumulation

Author

Listed:
  • Pau Roldán

    (Banco de España)

  • Sonia Gilbukh

    (Cuny Baruch College)

Abstract

This paper analyzes the macroeconomic implications of customer capital accumulation at the firm level. We build an analytically tractable search model of firm dynamics in which firms compete for customers by posting pricing contracts in the product market. Cross-sectional price dispersion emerges in equilibrium because firms of different sizes and productivities use different pricing strategies to strike a balance between attracting new customers and exploiting incumbent ones. Using micro-pricing data from the U.S. retail sector, we calibrate the model to match moments from the cross-sectional distribution of sales and prices, and use our estimated model to explain sluggish aggregate dynamics and cross-sectional heterogeneity in the response of markups to aggregate shocks. We find that there is incomplete price pass-through leading to procyclicality in the average markup, with smaller firms being more responsive to shocks than larger firms.

Suggested Citation

  • Pau Roldán & Sonia Gilbukh, 2018. "Firm dynamics and pricing under customer capital accumulation," Working Papers 1838, Banco de España.
  • Handle: RePEc:bde:wpaper:1838
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    Cited by:

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    More about this item

    Keywords

    customer capital; product market frictions; directed search; firm dynamics; dynamic contracts; price dispersion;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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