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Price Dynamics with Customer Markets

Author

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  • Paciello, Luigi
  • Pozzi, Andrea
  • Trachter, Nicholas
Abstract
The customer base of a firm is an important and persistent determinant of its performance. Using rich U.S. data on consumer shopping behavior and good prices, we document that customer turnover is sensitive to price variation. Motivated by this finding, we study an economy where the customer base of a firm is persistent because of search frictions preventing customers from freely relocating across suppliers of consumption goods, and firms set prices under customer retention concerns. The key feature of our model is that the elasticity of the customer base to price -the extensive margin elasticity of demand- depends on the customers’ endogenous opportunity cost of search, and interacts with heterogeneity in firm productivity. More productive firms enjoy less customer attrition and lower elasticity of demand. An increase in customers search intensity leads to higher demand elasticity and lower prices. This provides a new channel affecting the relationship between consumer search and price markups in response to aggregate shocks. In particular, an increase in the utility of consumption relatively to the cost of search results in higher demand elasticity and lower prices, amplifying the effects of demand shocks on output. We highlight that the price response to demand shocks is heterogeneous across firms affecting dispersion in prices and consumption across consumers.

Suggested Citation

  • Paciello, Luigi & Pozzi, Andrea & Trachter, Nicholas, 2017. "Price Dynamics with Customer Markets," CEPR Discussion Papers 11753, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11753
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    Cited by:

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    2. Sungki Hong, 2017. "Customer Capital, Markup Cyclicality, and Amplification," Working Papers 2017-33, Federal Reserve Bank of St. Louis.
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    4. Leo Kaas & Bihemo Kimasa, 2021. "Firm Dynamics With Frictional Product And Labor Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(3), pages 1281-1317, August.
    5. Sungki Hong, 2019. "Customer Capital, Markup Cyclicality, and Amplification," 2019 Meeting Papers 959, Society for Economic Dynamics.
    6. Daniel Levy & Andrew T. Young, 2021. "Promise, trust, and betrayal: Costs of breaching an implicit contract," Southern Economic Journal, John Wiley & Sons, vol. 87(3), pages 1031-1051, January.
    7. Weiqing Li & Qianyi Dan & Maomao Chi & Weijun Wang, 2021. "Influence of Price Level and Perceived Price Dispersion on Consumer Information Search Behaviour: Moderating Effect of Durables and Consumables," Sustainability, MDPI, vol. 13(4), pages 1-13, February.
    8. Claudio Michelacci & Andrea Pozzi & Luigi Paciello, 2018. "The extensive margin of aggregate consumption demand," 2018 Meeting Papers 1008, Society for Economic Dynamics.
    9. Stéphane Dupraz, 2024. "A Kinked‐Demand Theory of Price Rigidity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(2-3), pages 325-363, March.
    10. repec:hal:spmain:info:hdl:2441/3bi2m7jdvh8ft9m3o2c19do3i8 is not listed on IDEAS
    11. Pau Roldan & Sophia Gilbukh, 2017. "Firm Dynamics and Pricing under Customer Capital Accumulation," 2017 Meeting Papers 1235, Society for Economic Dynamics.
    12. Sebastian Heise, 2016. "Firm-to-Firm Relationships and Price Rigidity - Theory and Evidence," CESifo Working Paper Series 6226, CESifo.
    13. Omid Zamani & Thomas Bittmann & Jens‐Peter Loy, 2024. "Does the internet bring food prices closer together? Exploring search engine query data in Iran," Journal of Agricultural Economics, Wiley Blackwell, vol. 75(2), pages 688-715, June.
    14. Roldan-Blanco, Pau & Gilbukh, Sonia, 2021. "Firm dynamics and pricing under customer capital accumulation," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 99-119.
    15. David Berger & Joseph S. Vavra, 2013. "Volatility and Pass-through," NBER Working Papers 19651, National Bureau of Economic Research, Inc.
    16. Abbritti, Mirko & Aguilera-Bravo, Asier & Trani, Tommaso, 2021. "Long-term business relationships, bargaining and monetary policy," Economic Modelling, Elsevier, vol. 101(C).
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    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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