Product Market Frictions, Bargaining and Pass-Through
Mirko Abbritti
No 19/12, Faculty Working Papers from School of Economics and Business Administration, University of Navarra
Abstract:
Empirical evidence shows that the pass-through of cost shocks to prices is very low, and delayed. This is in stark contrast with the standard framework of monopolistic competition used in macro models, which, absent nominal rigidities, implies complete pass-through of cost shocks to prices. This paper develops a model of pricing dynamics in business to business relationships where incomplete pass-through arises endogenously. The model is based on two assumptions. First, both retailers and wholesalers invest resources to form new, long-term, business relationships. Second, once a business relationship is formed, the prices and the quantities of the intermediate good exchanged are set in a bilateral bargaining between wholesalers and retailers. The repeated nature of the interactions between firms raises the question of whether wholesale prices are allocative. We show that wholesale prices still play an allocative role in the model, but this role is likely to be quite limited.
Keywords: price dynamics; product market frictions; price bargain; customer relations; real rigidities; incomp (search for similar items in EconPapers)
JEL-codes: E10 E30 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2012-11-15
New Economics Papers: this item is included in nep-com, nep-mac and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:una:unccee:wp1912
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