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Firm Dynamics and Pricing under Customer Capital Accumulation

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  • Pau Roldan

    (New York University)

  • Sophia Gilbukh

    (NYU Stern)

Abstract

What is the relationship between the rate at which firms accumulate their stock of demand over time and the prices that they set for their products? This paper analyzes the implications of cus- tomer capital accumulation for firms’ pricing behavior and firm dynamics. We build an analytically tractable directed search model of the product market in which firms are ex-post heterogeneous in their customer base and commit to the prices they post. The model features dynamic contracts with endogenous customer reallocation, endogenous entry and exit of firms, and allows for an exact characterization of the firm distribution. Price rigidity at the firm level emerges as an equilibrium outcome, and there is price dispersion in the cross-section because firms of different sizes use differ- ent pricing strategies to strike a balance between attracting new customers and retaining incumbent ones. We show that our mechanism can generate realistic firm dynamics, a right-skewed firm size distribution, and size- and age-dependent markups which are in line with the data.

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  • Pau Roldan & Sophia Gilbukh, 2017. "Firm Dynamics and Pricing under Customer Capital Accumulation," 2017 Meeting Papers 1235, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:1235
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    Cited by:

    1. Bihemo Kimasa & Leo Kaas, 2016. "Firm dynamics with frictional product and labor markets," 2016 Meeting Papers 1033, Society for Economic Dynamics.
    2. Laurent Cavenaile & Pau Roldan, 2019. "Advertising, innovation and economic growth," Working Papers 1902, Banco de España;Working Papers Homepage.
    3. Alan Finkelstein Shapiro & Andres Gonzalez Gomez & Jessica Roldan-Pena & Victoria Nuguer, 2018. "Price Dynamics and the Financing Structure of Firms in Emerging Economies," 2018 Meeting Papers 339, Society for Economic Dynamics.

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