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Customer Capital

  • Francois Gourio
  • Leena Rudanko

Firms spend substantial resources on marketing and selling. Interpreting this as evidence of frictions in product markets, which require firms to spend resources on customer acquisition, this paper develops a search theoretic model of firm dynamics in frictional product markets. Introducing search frictions generates long-term customer relationships, rendering the customer base a state variable for firms, which is sluggish to adjust. This affects: the level and volatility of firm investment, sales, profits, value and markups, the timing of firm responses to shocks, and the relationship between investment and Tobin's q. We document support for these predictions in firm-level data from Compustat, using cross-industry variation in selling expenses to quantify differences in the degree of friction across markets.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17191.

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Date of creation: Jul 2011
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Publication status: published as \Customer Capital" with Francois Gourio Review of Economic Studies, forthcoming
Handle: RePEc:nbr:nberwo:17191
Note: CF EFG IO ME
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