Investment in Demand and Dynamic Competition for Customers

Joachim Hubmer () and Lukas Nord ()
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Joachim Hubmer: University of Pennsylvania
Lukas Nord: University of Pennsylvania

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: The allocation of demand across firms determines aggregate productivity. Firms affect allocations through prices and non-price investment in demand. We develop a framework with search frictions and dynamic customer relationships in which demand investment shapes allocations directly by matching customers to suppliers and indirectly by driving price competition. A quantitative version matches key facts on how firms compete for customers. In equilibrium, markup distortions and business-stealing externalities induce misallocation and demand over-investment. Equilibrium interactions between demand investment and pricing create policy complementarities. Rising demand investment can raise concentration without raising market power, while reducing firms’ intangible value through equilibrium effects.

Pages: 84 pages
Date: 2026
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