External Financing and Customer Capital: A Financial Theory of Markups

Winston Dou and Yan Ji ()
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Yan Ji: The Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong

Management Science, 2021, vol. 67, issue 9, 5569-5585

Abstract: We develop a continuous-time industry equilibrium model of monopolistic competition to understand how product markups are determined in the presence of external financing costs and customer capital. Firms optimally set markups to balance the tradeoff between profiting from their existing customer base and developing their future customer base. We characterize how the equilibrium markups are determined by the interaction between the marginal value of corporate liquidity and the marginal value of customer base. Firms’ markups are more responsive to changes in their marginal value of corporate liquidity when the marginal value of customer base is higher. Moreover, the model predicts that greater product market threats lead to more conservative financial policies, which is supported by the data.

Keywords: markups; customer base; external financing costs; monopolistic competition; corporate liquidity; industry dynamics (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:67:y:2021:i:9:p:5569-5585

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