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Price Setting with Customer Capital: Sales, Teasers, and Rigidity

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  • Leena Rudanko

Abstract

This paper studies price setting in an equilibrium search model of frictional product markets with long-term customer relationships. The theory gives rise to temporary sales when pricing is constrained to be anonymous across a firm’s customer base. Equilibrium prices are inefficiently high, giving rise to overselling and excess trade, and the emergence of sale pricing can improve allocations by limiting this overselling. Pricing is also characterized by an asymmetry involving a stable regular price and variable sale price when firms face idiosyncratic shocks. Absent anonymous pricing, the theory gives rise to teaser pricing, which attains efficient allocations. Teaser pricing is also characterized by a stable regular price and variable teaser price, but in this case the seeming rigidity is not allocative

Suggested Citation

  • Leena Rudanko, 2022. "Price Setting with Customer Capital: Sales, Teasers, and Rigidity," Working Papers 22-31, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:94738
    DOI: 10.21799/frbp.wp.2022.31
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    References listed on IDEAS

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    More about this item

    Keywords

    Product Market Search; Customer Base; Sales; Teasers; Price Rigidity;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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