Series: Working Papers. 1838.
Author: Pau Roldan and Sonia Gilbukh.
Non-financial corporations, businesses
- Quantitative methods
- Prices and margins
- Inflation
Published in: Journal of Monetary Economics. Volume 118, March 2021, Pages 99-119
Full document
Abstract
This paper analyzes the macroeconomic implications of customer capital accumulation at
the firm level. We build an analytically tractable search model of firm dynamics in which firms
compete for customers by posting pricing contracts in the product market. Cross-sectional
price dispersion emerges in equilibrium because firms of different sizes and productivities use
different pricing strategies to strike a balance between attracting new customers and exploiting incumbent ones. Using micro-pricing data from the U.S. retail sector, we calibrate the model to match moments from the cross-sectional distribution of sales and prices, and use our estimated model to explain sluggish aggregate dynamics and cross-sectional heterogeneity in the response of markups to aggregate shocks. We find that there is incomplete price pass-through leading to procyclicality in the average markup, with smaller firms being more responsive to shocks than larger firms.