Understanding International Prices: Customers as Capital

Posted: 11 Sep 2008

See all articles by Lukasz A. Drozd

Lukasz A. Drozd

University of Pennsylvania - The Wharton School

Jaromir B. Nosal

Columbia Business School - Economics Department

Date Written: August 2008

Abstract

This paper develops a theory of pricing-to-market driven by marketing and bargaining frictions. Our key innovation is a capital theoretic model of marketing in which relations with customers are valuable. In our model, producers search and form long-lasting relations with their customers, and marketing helps overcome the search frictions involved in forming such matches. In the context of international business cycle patterns, the model accounts for observations that are puzzles for a large class of theories: (i) pricing-to-market; (ii) positive correlation of aggregate real export and import prices; (iii) excess volatility of the real exchange rate over the terms of trade; and (iv) low short-run and high long-run price elasticity of international trade flows. The behavior of quantities is shown to be on par with standard international business cycle theories that, in contrast to our model, assume low intrinsic elasticity of substitution between domestic and foreign goods.

Keywords: Pricing-to-market, Law of one price, Incomplete pass-through, International business cycles, Matching

JEL Classification: F41, E32, F31

Suggested Citation

Drozd, Lukasz A. and Nosal, Jaromir B., Understanding International Prices: Customers as Capital (August 2008). Available at SSRN: https://ssrn.com/abstract=1265218

Lukasz A. Drozd (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Jaromir B. Nosal

Columbia Business School - Economics Department ( email )

1022 IAB Economics
420 W 118th Street
New York, NY 10027
United States
2128414005 (Phone)

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