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Investment in Demand and Dynamic Competition for Customers

Author

Listed:
  • Joachim Hubmer

    (University of Pennsylvania)

  • Lukas Nord

    (University of Pennsylvania)

Abstract

The allocation of demand across firms determines aggregate productivity. Firms affect allocations through prices and non-price investment in demand. We develop a framework with search frictions and dynamic customer relationships in which demand investment shapes allocations directly by matching customers to suppliers and indirectly by driving price competition. A quantitative version matches key facts on how firms compete for customers. In equilibrium, markup distortions and business-stealing externalities induce misallocation and demand over-investment. Equilibrium interactions between demand investment and pricing create policy complementarities. Rising demand investment can raise concentration without raising market power, while reducing firms’ intangible value through equilibrium effects.

Suggested Citation

  • Joachim Hubmer & Lukas Nord, 2026. "Investment in Demand and Dynamic Competition for Customers," PIER Working Paper Archive 26-006, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    • Handle: RePEc:pen:papers:26-006
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    References listed on IDEAS

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