Understanding international prices: customers as capital
Lukasz Drozd and
No 411, Staff Report from Federal Reserve Bank of Minneapolis
This paper develops a theory of pricing-to-market driven by marketing and bargaining frictions. Our key innovation is a capital theoretic model of marketing in which relations with customers are valuable. In our model, producers search and form long-lasting relations with their customers, and marketing helps overcome the search frictions involved in forming such matches. In the context of international business cycle patterns, the model accounts for observations that are puzzles for a large class of theories: (i) pricing-to-market, (ii) positive correlation of aggregate real export and import prices, (iii) excess volatility of the real exchange rate over the terms of trade, and (iv) low short-run and high long-run price elasticity of international trade flows. The behavior of quantities is shown to be on par with standard international business cycle theories that, in contrast to our model, assume low intrinsic elasticity of substitution between domestic and foreign goods.
Keywords: Business cycles; Prices; International business enterprises (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mkt and nep-opm
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Journal Article: Understanding International Prices: Customers as Capital (2012)
Working Paper: Understanding International Prices: Customers as Capital (2010)
Working Paper: Understanding International Prices: Customers as Capital (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:411
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