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Search in the Product Market and the Real Business Cycle

  • Thomas Y. MATHA

    (CENTRAL BANK OF LUXEMBOURG, Economics and Research Department)

  • Olivier PIERRARD

    (CENTRAL BANK OF LUXEMBOURG, Economics and Research Department and UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

Empirical evidence suggests that most firms operate in imperfectly competitivemarkets. We develop a search-matching model between wholesalers and retailers. Firms face search costs and form long-term relationships. Price bargain results in both wholesaler and retailer markups, depending on firms’ relative bargaining power. We simulate the model to explore the role of product market search frictions in business cycles. We show that the way search costs are modelled is crucial to provide a realistic picture of firms’ business environment and improve the cyclical properties of an otherwise standard real business cycle model.

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Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 2009019.

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Length: 29
Date of creation: 01 Jul 2009
Date of revision:
Handle: RePEc:ctl:louvir:2009019
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