Understanding international prices: customers as capital

Lukasz Drozd and Jaromir Nosal

No 411, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: This paper develops a theory of pricing-to-market driven by marketing and bargaining frictions. Our key innovation is a capital theoretic model of marketing in which relations with customers are valuable. In our model, producers search and form long-lasting relations with their customers, and marketing helps overcome the search frictions involved in forming such matches. In the context of international business cycle patterns, the model accounts for observations that are puzzles for a large class of theories: (i) pricing-to-market, (ii) positive correlation of aggregate real export and import prices, (iii) excess volatility of the real exchange rate over the terms of trade, and (iv) low short-run and high long-run price elasticity of international trade flows. The behavior of quantities is shown to be on par with standard international business cycle theories that, in contrast to our model, assume low intrinsic elasticity of substitution between domestic and foreign goods.

Keywords: Prices; Business cycles; International business enterprises (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mkt and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (131)

Downloads: (external link)
http://www.minneapolisfed.org/research/SR/SR411.pdf
Our link check indicates that this URL is bad, the error code is: 403 Forbidden
http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4013 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 403 Forbidden

Related works:
Journal Article: Understanding International Prices: Customers as Capital (2012)
Working Paper: Understanding International Prices: Customers as Capital (2010)
Working Paper: Understanding International Prices: Customers as Capital (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:411

Access Statistics for this paper

More papers in Staff Report from Federal Reserve Bank of Minneapolis Contact information at EDIRC.
Bibliographic data for series maintained by Kate Hansel ().