Economics at your fingertips  

Firm-to-Firm Relationships and Price Rigidity: Theory and Evidence

Sebastian Heise
Additional contact information
Sebastian Heise: Federal Reserve Bank of New York

No 937, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: Economists have long suspected that firm-to-firm relationships might increase price rigidity due to the use of explicit or implicit fixed-price contracts. Using transaction-level import data from the U.S. Census, I study the responsiveness of prices to exchange rate changes and show that prices are in fact substantially more responsive to these cost shocks in older versus newly formed relationships. Based on additional stylized facts about price setting and trading volumes throughout a relationship's life cycle, I develop a model of relationship dynamics in which a buyer and a seller interact repeatedly under limited commitment and accumulate relationship capital in proportion to sales to lower production costs. In a new relationship, capital is low, and the seller responds little to shocks and sets low mark-ups to incentivize the buyer to maintain the association and to build up relationship capital. These motives are weaker in old relationships, which on average have more capital, increasing the price response to shocks and raising mark-ups. Once structurally estimated, the model generates countercyclical mark-ups and countercyclical pass-through of shocks through variation in the economy's average relationship length, which rises in recessions.

New Economics Papers: this item is included in nep-com
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link) (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this paper

More papers in 2018 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().

Page updated 2019-01-31
Handle: RePEc:red:sed018:937