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Search and Bargaining in the Product Market and Price Rigidities

Mirko Abbritti and Tommaso Trani

No 09/14, Faculty Working Papers from School of Economics and Business Administration, University of Navarra

Abstract: This paper develops a model of pricing dynamics in business to business relationships. The formation of business relationships is a process of search and matching between retailers and wholesalers in the product market. The size of each transaction and the related price are set through bilateral bargaining. There are three key factors that influence the reaction of prices and quantities to cost shocks: the persistence of the shocks, the adjustment of final goods production and the search externalities. These factors determine how firms adjust, whether through the intensive margin, through the extensive margin or through both. Based on this, we assess to what extent wholesale prices affect the allocation of consumption in closed economy and deliver expenditure switching in open economy.

Pages: 44 pages
Date: 2014-11-01
New Economics Papers: this item is included in nep-com, nep-dge and nep-mac
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http://www.unav.edu/documents/10174/6546776/wp_09_14.pdf (application/pdf)

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