Seminar

Price Dynamics with Customer Markets

Luigi Paciello (Einaudi Institute for Economics and Finance and CEPR)

March 23, 2015, 17:00–18:30

Room MS 001

Macroeconomics Seminar

Abstract

We provide new evidence of the relationship between firm pricing and customer dynamics. We build and quantify a model where firms choose prices taking into account their effect on the evolution of their customer base, and customers face frictions to reallocate to other firms. The model accounts for salient features of retail price data, such as the high kurtosis of the price distribution and the low pass-through of cost shocks. We also study aggregate dynamics in our framework and show that microfounding customer reallocation leads to a countercyclical response of markups to demand shocks.