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Firm Dynamics and Pricing under Customer Capital Accumulation

Pau Roldan () and Sophia Gilbukh
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Sophia Gilbukh: NYU Stern

No 1235, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: What is the relationship between the rate at which firms accumulate their stock of demand over time and the prices that they set for their products? This paper analyzes the implications of cus- tomer capital accumulation for firms’ pricing behavior and firm dynamics. We build an analytically tractable directed search model of the product market in which firms are ex-post heterogeneous in their customer base and commit to the prices they post. The model features dynamic contracts with endogenous customer reallocation, endogenous entry and exit of firms, and allows for an exact characterization of the firm distribution. Price rigidity at the firm level emerges as an equilibrium outcome, and there is price dispersion in the cross-section because firms of different sizes use differ- ent pricing strategies to strike a balance between attracting new customers and retaining incumbent ones. We show that our mechanism can generate realistic firm dynamics, a right-skewed firm size distribution, and size- and age-dependent markups which are in line with the data.

New Economics Papers: this item is included in nep-bec, nep-com, nep-dge, nep-mac and nep-mkt
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:1235

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