Understanding International Prices: Customers as Capital

Lukasz A. Drozd and Jaromir B. Nosal

American Economic Review, 2012, vol. 102, issue 1, pages 364-95

Abstract: The article develops a new theory of pricing to market driven by dynamic frictions of building market shares. Our key innovation is a capital theoretic model of marketing in which relations with customers are valuable. We discipline the introduced friction using data on differences between short-run and long-run price elasticity of international trade flows. We show that the model accounts for several pricing "puzzles" of international macroeconomics. (JEL E13, F14, F31, F41, F44, M31)

Date: 2012
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