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Customer Relationship and Sales

  • Shouyong Shi

I analyze a search equilibrium in a large market where customer relationship based on past trade arises endogenously together with service priority and sales. Specifically, there exists a unique equilibrium where it is optimal for a buyer to make repeat purchases from the related seller and optimal for a seller to give service priority to the related buyer. Customer relationship always improves welfare by reducing search frictions, but the equilibrium is socially efficient only when the buyer/seller ratio in the market is below a critical level. When the buyer/seller ratio exceeds this critical level, the equilibrium is inefficient because it fails to induce the coexistence of trading priority for related buyers and partial mixing of buyers for related sellers. Customer relationship induces price variations for individual sellers over time even when market conditions do not change. A seller posts a (high) regular price to sell to the related buyer and, once the seller loses the relationship, the seller posts a (low) sale price to sell to unrelated buyers until he gains a relationship. I also examine how market conditions affect the aggregate stock of relationships, markups, the size and the duration of a sale.

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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-490.

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Length: Unknown pages
Date of creation: 03 Jun 2013
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Handle: RePEc:tor:tecipa:tecipa-490
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  1. Peter J. Klenow & Oleksiy Kryvtsov, 2007. "State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation?," Discussion Papers 07-007, Stanford Institute for Economic Policy Research.
  2. Robert Shimer, 2001. "The Assignment of Workers to Jobs In an Economy with Coordination Frictions," NBER Working Papers 8501, National Bureau of Economic Research, Inc.
  3. Francisco M. Gonzalez & Shouyong Shi, 2009. "An Equilibrium Theory of Learning, Search and Wages," Working Papers tecipa-384, University of Toronto, Department of Economics.
  4. Dutta, Shantanu & Bergen, Mark & Levy, Daniel, 2002. "Price flexibility in channels of distribution: Evidence from scanner data," Journal of Economic Dynamics and Control, Elsevier, vol. 26(11), pages 1845-1900, September.
  5. Shouyong Shi, 2008. "Directed Search for Equilibrium Wage-Tenure Contracts," Working Papers tecipa-343, University of Toronto, Department of Economics.
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  8. Kyle Bagwell, 1987. "Introductory Price as a Signal of Cost in a Model of Repeat Business," Discussion Papers 722, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Judith A. Chevalier & Anil K. Kashyap & Peter E. Rossi, 2000. "Why Don't Prices Rise During Periods of Peak Demand? Evidence from Scanner Data," NBER Working Papers 7981, National Bureau of Economic Research, Inc.
  10. Shouyong Shi, 2002. "A Directed Search Model of Inequality with Heterogeneous Skills and Skill-Biased Technology," Review of Economic Studies, Oxford University Press, vol. 69(2), pages 467-491.
  11. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
  12. Salop, S & Stiglitz, J E, 1982. "The Theory of Sales: A Simple Model of Equilibrium Price Dispersion with Identical Agents," American Economic Review, American Economic Association, vol. 72(5), pages 1121-30, December.
  13. Manolis Galenianos & Philipp Kircher, 2009. "Directed search with multiple job applications," LSE Research Online Documents on Economics 29702, London School of Economics and Political Science, LSE Library.
  14. Martin Pesendorfer, 2002. "Retail Sales: A Study of Pricing Behavior in Supermarkets," The Journal of Business, University of Chicago Press, vol. 75(1), pages 33-66, January.
  15. Peters, Michael, 1984. "Bertrand Equilibrium with Capacity Constraints and Restricted Mobility," Econometrica, Econometric Society, vol. 52(5), pages 1117-27, September.
  16. Shilony, Yuval, 1977. "Mixed pricing in oligopoly," Journal of Economic Theory, Elsevier, vol. 14(2), pages 373-388, April.
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