Market Share and Price Rigidity

Isaac Kleshchelski and Nicolas Vincent

No 08-01, Cahiers de recherche from HEC Montréal, Institut d'économie appliquée

Abstract: Survey evidence shows that the main reason why .rms keep prices stable is that they are concerned about losing customers or market share. We construct a model in which .rms care about the size of their customer base. Firms and customers form long-term relationships because consumers incur costs to switch sellers. In this environment, .rms view customers as long-lived assets. We use a general equilibrium framework where industries and .rms are buffeted by idiosyncratic marginal cost shocks. We obtain three main results. First, cost pass-through into prices is incomplete. Second, the degree of pass-through is an increasing function of the persistence of cost shocks. Third, there is a non-monotonic relationship between the size of switching costs and the rate of pass-through. In addition, we characterize the heterogenous response across industries to marginal cost shocks. The implications of our model are consistent with empirical evidence.

Keywords: Price Rigidity; Market Share; Customer Relations; Real Rigidities. (search for similar items in EconPapers)
JEL-codes: E30 L16 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2007-05
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

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Journal Article: Market share and price rigidity (2009)
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