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Customer Relationship and Sales

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  • Shouyong Shi

Abstract

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.

Suggested Citation

  • Shouyong Shi, 2013. "Customer Relationship and Sales," Working Papers tecipa-490, University of Toronto, Department of Economics.
    • Handle: RePEc:tor:tecipa:tecipa-490
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    Cited by:

    1. Emmanuel Saez & Pascal Michaillat, 2013. "A Theory of Aggregate Supply and Aggregate Demand as Functions of Market Tightness with Prices as Parameters," 2013 Meeting Papers 1216, Society for Economic Dynamics.
    2. Petrosky-Nadeau, Nicolas & Wasmer, Etienne, 2015. "Macroeconomic dynamics in a model of goods, labor, and credit market frictions," Journal of Monetary Economics, Elsevier, vol. 72(C), pages 97-113.
    3. Shi, Shouyong, 2016. "Customer relationship and sales," Journal of Economic Theory, Elsevier, vol. 166(C), pages 483-516.
    4. Petrosky-Nadeau, Nicolas & Wasmer, Etienne, 2015. "Macroeconomic dynamics in a model of goods, labor, and credit market frictions," Journal of Monetary Economics, Elsevier, vol. 72(C), pages 97-113.
    5. Petrosky-Nadeau, Nicolas & Wasmer, Etienne, 2015. "Macroeconomic dynamics in a model of goods, labor, and credit market frictions," Journal of Monetary Economics, Elsevier, vol. 72(C), pages 97-113.
    6. Randall Wright & Philipp Kircher & Benoit Julîen & Veronica Guerrieri, 2017. "Directed Search: A Guided Tour," NBER Working Papers 23884, National Bureau of Economic Research, Inc.
    7. Alok Johri & Terry Yip, 2017. "Financial Shocks,Supply-chain Relationships and the Great Trade Collapse," Department of Economics Working Papers 2017-11, McMaster University.
    8. Kim, Byung Woon & Park, Joonho & Youl Ko, Chang, 2013. "Cost allocation of WCDMA and wholesale pricing for mVoIP and data services," Telecommunications Policy, Elsevier, vol. 37(1), pages 35-47.

    More about this item

    Keywords

    Customer relationship; Sales; Directed search;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

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