Title: Price Setting with Customer Retention Concerns
Abstract: We consider a model where customers face frictions when changing their supplier, generating sluggishness in the rm’s customer base. Firms care about retaining customers and this aects 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 concerns reduces markups, more markedly for less productive rms. We show that our model delivers pro-cyclical markups, as well as heterogeneous pass-through of cost shocks. These results help explaining recent empirical evidence.
Publication Year: 2013
Publication Date: 2013-01-01
Language: en
Type: article
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