Working Paper

Price Setting with Customer Capital: Sales, Teasers, and Rigidity

Abstract: This paper studies price setting in an equilibrium search model of frictional product markets with long-term customer relationships. The theory gives rise to temporary sales when pricing is constrained to be anonymous across a firm’s customer base. Equilibrium prices are inefficiently high, giving rise to overselling and excess trade, and the emergence of sale pricing can improve allocations by limiting this overselling. Pricing is also characterized by an asymmetry involving a stable regular price and variable sale price when firms face idiosyncratic shocks. Absent anonymous pricing, the theory gives rise to teaser pricing, which attains efficient allocations. Teaser pricing is also characterized by a stable regular price and variable teaser price, but in this case the seeming rigidity is not allocative

Keywords: Product Market Search; Customer Base; Sales; Teasers; Price Rigidity;

JEL Classification: E30; D83; L11; L81;

https://doi.org/10.21799/frbp.wp.2022.31

Bibliographic Information

Provider: Federal Reserve Bank of Philadelphia

Part of Series: Working Papers

Publication Date: 2022-09-09

Number: 22-31