Price Dynamics with Customer Markets

34 Pages Posted: 20 Feb 2019

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

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Date Written: February 2019

Abstract

Using microdata from a U.S. retailer we document that customer turnover responds to pricing. We study the optimal price setting of a firm when its demand has an extensive margin that is elastic to price due to customers' opportunity to search for an alternative supplier. The price pass‐through of idiosyncratic productivity shocks is incomplete, with the most productive firms passing through more. Firm demand is more persistent than price. Higher demand is associated with lower markups due to higher search intensity, despite flexible prices. We find empirical support for these predictions in microdata from the retail industry.

Suggested Citation

Paciello, Luigi and Pozzi, Andrea and Trachter, Nicholas, Price Dynamics with Customer Markets (February 2019). International Economic Review, Vol. 60, Issue 1, pp. 413-446, 2019, Available at SSRN: https://ssrn.com/abstract=3335311 or http://dx.doi.org/10.1111/iere.12358

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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