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Markups Dynamics with Customer Markets

Author

Listed:
  • Nicholas Trachter

    (Federal Reserve Bank of Richmond)

  • Andrea Pozzi

    (Einaudi Institute for Economics and Fina)

  • Luigi Paciello

    (Einaudi Institute (EIEF))

Abstract

We study a model where customers face frictions when changing their supplier, generating sluggishness in the firm's customer base. Firms care about expanding their customer base and this affects their pricing strategy. We characterize optimal pricing in this model and estimate it using data on the evolution of the customer base of a large US retailer. The introduction of customer markets reduces average markups, more markedly for less productive firms. We use the model to perform a counterfactual exercise and investigate the cyclical behaviour of markups in response to both aggregate supply and demand shocks.

Suggested Citation

  • Nicholas Trachter & Andrea Pozzi & Luigi Paciello, 2014. "Markups Dynamics with Customer Markets," 2014 Meeting Papers 39, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:39
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    References listed on IDEAS

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    Cited by:

    1. Hassan Afrouzi, 2016. "Endogenous firm competition and the cyclicality of markups," Globalization Institute Working Papers 265, Federal Reserve Bank of Dallas.

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