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Price Dynamics with Customer Markets

Author

Listed:
  • Paciello, Luigi
  • Pozzi, Andrea
  • Trachter, Nicholas

Abstract

We study a model of firm price setting with customer markets and empirically evaluate its predictions. Our framework captures the dynamics of customers in response to a change in the price set by firms, describes the behavior of optimal prices in the presence of customer retention concerns, and delivers a general equilibrium model of price and customer dynamics. We exploit micro data on purchases from a large U.S. retailer by a panel of households to quantify the model and compare it to the counterfactual benchmark of the monopolistic competition setting. We show that our model with customer markets has markedly di erent implications in terms of the equilibrium price distribution, and better fits the available empirical evidence on retail prices. Moreover, the dynamic of the response of demand to policy relevant shocks is also distinctive. Our results suggest that inertia in customer reallocation across firms increases the persistence in the response of firms' demand to these shocks.

Suggested Citation

  • Paciello, Luigi & Pozzi, Andrea & Trachter, Nicholas, 2014. "Price Dynamics with Customer Markets," CEPR Discussion Papers 10220, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10220
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    Cited by:

    1. Shi, Shouyong, 2016. "Customer relationship and sales," Journal of Economic Theory, Elsevier, vol. 166(C), pages 483-516.
    2. Sungki Hong, 2017. "Customer Capital, Markup Cyclicality, and Amplification," Working Papers 2017-33, Federal Reserve Bank of St. Louis.
    3. Cabral, Luís & Gilbukh, Sonia, 2020. "Rational buyers search when prices increase," Journal of Economic Theory, Elsevier, vol. 187(C).
    4. Leo Kaas & Bihemo Kimasa, 2021. "Firm Dynamics With Frictional Product And Labor Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(3), pages 1281-1317, August.
    5. Sungki Hong, 2019. "Customer Capital, Markup Cyclicality, and Amplification," 2019 Meeting Papers 959, Society for Economic Dynamics.
    6. Daniel Levy & Andrew T. Young, 2021. "Promise, trust, and betrayal: Costs of breaching an implicit contract," Southern Economic Journal, John Wiley & Sons, vol. 87(3), pages 1031-1051, January.
    7. Weiqing Li & Qianyi Dan & Maomao Chi & Weijun Wang, 2021. "Influence of Price Level and Perceived Price Dispersion on Consumer Information Search Behaviour: Moderating Effect of Durables and Consumables," Sustainability, MDPI, vol. 13(4), pages 1-13, February.
    8. Claudio Michelacci & Andrea Pozzi & Luigi Paciello, 2018. "The extensive margin of aggregate consumption demand," 2018 Meeting Papers 1008, Society for Economic Dynamics.
    9. Stéphane Dupraz, 2024. "A Kinked‐Demand Theory of Price Rigidity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(2-3), pages 325-363, March.
    10. repec:hal:spmain:info:hdl:2441/3bi2m7jdvh8ft9m3o2c19do3i8 is not listed on IDEAS
    11. Pau Roldan & Sophia Gilbukh, 2017. "Firm Dynamics and Pricing under Customer Capital Accumulation," 2017 Meeting Papers 1235, Society for Economic Dynamics.
    12. Sebastian Heise, 2016. "Firm-to-Firm Relationships and Price Rigidity - Theory and Evidence," CESifo Working Paper Series 6226, CESifo.
    13. Omid Zamani & Thomas Bittmann & Jens‐Peter Loy, 2024. "Does the internet bring food prices closer together? Exploring search engine query data in Iran," Journal of Agricultural Economics, Wiley Blackwell, vol. 75(2), pages 688-715, June.
    14. Roldan-Blanco, Pau & Gilbukh, Sonia, 2021. "Firm dynamics and pricing under customer capital accumulation," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 99-119.
    15. David Berger & Joseph S. Vavra, 2013. "Volatility and Pass-through," NBER Working Papers 19651, National Bureau of Economic Research, Inc.
    16. Abbritti, Mirko & Aguilera-Bravo, Asier & Trani, Tommaso, 2021. "Long-term business relationships, bargaining and monetary policy," Economic Modelling, Elsevier, vol. 101(C).
    17. Mario Canales & Bernabe Lopez-Martin, 2021. "Uncertainty, Risk, and Price-Setting: Evidence from CPI Microdata," Working Papers Central Bank of Chile 908, Central Bank of Chile.
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    More about this item

    Keywords

    Customer markets; Price setting; Product market frictions;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • 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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