Working Paper: CEPR ID: DP10220
Authors: Luigi Paciello; Andrea Pozzi; Nicholas Trachter
Abstract: We study a model of firm price setting with customer markets and empirically evaluate its predictions. Our framework captures the dynamics of customers in response to a change in the price set by firms, describes the behavior of optimal prices in the presence of customer retention concerns, and delivers a general equilibrium model of price and customer dynamics. We exploit micro data on purchases from a large U.S. retailer by a panel of households to quantify the model and compare it to the counterfactual benchmark of the monopolistic competition setting. We show that our model with customer markets has markedly di erent implications in terms of theequilibrium price distribution, and better fits the available empirical evidence on retail prices. Moreover, the dynamic of the response of demand to policy relevant shocks is also distinctive. Our results suggest that inertia in customer reallocation across firms increases the persistence in the response of firms' demand to these shocks.
Keywords: customer markets; price setting; product market frictions
JEL Codes: E12; E30; L16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| 1% increase in the price of the customer's typical basket of grocery goods (D19) | increase in the firm's yearly customer turnover from 14% to 21% (L21) |
| price changes (P22) | customer exit rates (J63) |
| customer dynamics triggered by price changes (D49) | customer retention (M51) |
| presence of customer markets (D26) | alters price dynamics and customer behavior (D49) |
| customer markets (D16) | higher kurtosis and smaller dispersion in price distribution (C46) |
| customer markets introduce strategic complementarity in price setting (L13) | firms set prices closer to each other (L11) |