Working Paper: NBER ID: w17191
Authors: Francois Gourio; Leena Rudanko
Abstract: Firms spend substantial resources on marketing and selling. Interpreting this as evidence of frictions in product markets, which require firms to spend resources on customer acquisition, this paper develops a search theoretic model of firm dynamics in frictional product markets. Introducing search frictions generates long-term customer relationships, rendering the customer base a state variable for firms, which is sluggish to adjust. This affects: the level and volatility of firm investment, sales, profits, value and markups, the timing of firm responses to shocks, and the relationship between investment and Tobin's q. We document support for these predictions in firm-level data from Compustat, using cross-industry variation in selling expenses to quantify differences in the degree of friction across markets.
Keywords: Customer Capital; Firm Dynamics; Product Market Frictions
JEL Codes: D83; D92; E22; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| search frictions (F12) | long-term customer relationships (L14) |
| long-term customer relationships (L14) | firm investment (G32) |
| long-term customer relationships (L14) | sales (M31) |
| long-term customer relationships (L14) | profits (L21) |
| long-term customer relationships (L14) | markups (D43) |
| search frictions (F12) | firm investment (G32) |
| search frictions (F12) | sales (M31) |
| search frictions (F12) | profits (L21) |
| search frictions (F12) | markups (D43) |
| product market frictions (D49) | firm dynamics (D21) |
| increase in productivity (O49) | sales (M31) |
| increase in productivity (O49) | investment (G31) |
| frictions (D74) | investment and Tobin's q relationship (E22) |
| firm profits (L21) | investment behavior (G11) |