Price Dynamics with Customer Markets

55 Pages Posted: 17 Nov 2014

See all articles by Luigi Paciello

Luigi Paciello

Einaudi Institute for Economics and Finance (EIEF)

Andrea Pozzi

Einaudi Institute for Economics and Finance (EIEF)

Nicholas Trachter

Federal Reserve Banks - Federal Reserve Bank of Richmond

Multiple version iconThere are 4 versions of this paper

Date Written: October 2014

Abstract

We study a model of firm price setting with customer markets and empirically evaluate its predictions. Our framework captures the dynamics of customers in response to a change in the price set by firms, describes the behavior of optimal prices in the presence of customer retention concerns, and delivers a general equilibrium model of price and customer dynamics. We exploit micro data on purchases from a large U.S. retailer by a panel of households to quantify the model and compare it to the counterfactual benchmark of the monopolistic competition setting. We show that our model with customer markets has markedly different implications in terms of the equilibrium price distribution, and better fits the available empirical evidence on retail prices. Moreover, the dynamic of the response of demand to policy relevant shocks is also distinctive. Our results suggest that inertia in customer reallocation across firms increases the persistence in the response of firms' demand to these shocks.

Keywords: customer markets, price setting, product market frictions

JEL Classification: E12, E30, L16

Suggested Citation

Paciello, Luigi and Pozzi, Andrea and Trachter, Nicholas, Price Dynamics with Customer Markets (October 2014). CEPR Discussion Paper No. DP10220. Available at SSRN: https://ssrn.com/abstract=2526328

Luigi Paciello (Contact Author)

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Due Macelli, 73
Rome, 00187
Italy

Andrea Pozzi

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Due Macelli, 73
Rome, 00187
Italy

Nicholas Trachter

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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