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Price Dynamics with Customer Markets

Author

Listed:
  • Luigi Paciello

    (EIEF and CEPR)

  • Andrea Pozzi

    (EIEF and CEPR)

  • Nicholas Trachter

    (Federal Reserve Bank of Richmond)

Abstract

Using rich U.S. data on consumer shopping behavior and good prices, we document that customer turnover is sensitive to price variation. Motivated by this finding, we study an economy where the customer base of a firm is persistent because of search frictions preventing customers from freely relocating across suppliers of consumption goods, and firms set prices under customer retention concerns. The key feature of our model is that the elasticity of the customer base to price -the extensive margin elasticity of demand- depends on the customers’ endogenous opportunity cost of search, and interacts with heterogeneity in firm productivity. More productive firms enjoy less customer attrition and lower elasticity of demand. As firms compete for customers, the price pass-through of productivity shocks is incomplete, with the most productive firms passing-through more. Moreover, an increase in the utility of consumption relatively to the cost of search results in higher customers search intensity and, therefore, lower prices, amplifying the effects of demand shocks on consumption.

Suggested Citation

  • Luigi Paciello & Andrea Pozzi & Nicholas Trachter, 2013. "Price Dynamics with Customer Markets," EIEF Working Papers Series 1328, Einaudi Institute for Economics and Finance (EIEF), revised Dec 2017.
  • Handle: RePEc:eie:wpaper:1328
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    Cited by:

    1. Petrosky-Nadeau, Nicolas & Wasmer, Etienne & Zeng, Shutian, 2016. "Shopping time," Economics Letters, Elsevier, vol. 143(C), pages 52-60.
    2. Shi, Shouyong, 2016. "Customer relationship and sales," Journal of Economic Theory, Elsevier, vol. 166(C), pages 483-516.
    3. Hong, Sungki, 2017. "Customer Capital, Markup Cyclicality, and Amplification," Working Papers 2017-33, Federal Reserve Bank of St. Louis.
    4. David Berger & Joseph S. Vavra, 2013. "Volatility and Pass-through," NBER Working Papers 19651, National Bureau of Economic Research, Inc.
    5. Pau Roldan & Sophia Gilbukh, 2017. "Firm Dynamics and Pricing under Customer Capital Accumulation," 2017 Meeting Papers 1235, Society for Economic Dynamics.
    6. Petrosky-Nadeau, Nicolas & Wasmer, Etienne & Zeng, Shutian, 2016. "Shopping time," Economics Letters, Elsevier, vol. 143(C), pages 52-60.

    More about this item

    JEL classification:

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