Interactions Between Price Setting and Capital Investment in a Customer Market

In this essay a customer market model is constructed, where an entrepreneur-owned firm has two choice variables, namely the customer stock and the capital stock. The firm is assumed to be completely credit rationed and the investment procedure is characterised by time-to-build. The model is solved numerically to yield steady state paths for the ratio of customers to capital, investments and price. A comparative statics analysis is carried out so as to find out how price and investments respond to exogenous shocks. The model is also tested empirically with data for the Swedish manufacturing sector. The results from the theoretical model point to a close relationship between price setting and investment decisions, which is then confirmed by the empirical investigation.Price Setting; Customer Markets; Investments

Why Don't Prices Fall in a Recession? Financial Constraints, Investment, and Customer Relations

We construct a model of a financially constrained firm making pricing and investment decisions. The firm operates in a market where customers respond slowly to price changes and there are implementation lags in investment (time to build). Our model implies that the markup over marginal cost is counter-cyclical, the product price responds slowly to demand shocks, and quickly to cost shocks, and the price is strongly related to investment. Estimating the decision rules on aggregate data for Swedish industry, we find that the qualitative results are in line with our model.customer market; price rigidity; price equation; investment equation

Interaction between price setting and capital investment in a customer market

In this essay a customer market model is constructed, where an entrepreneur-owned firm has two choice variables, namely the customer stock and the capital stock. The firm is assumed to be completely credit rationed and the investment procedure is characterised by time-to-build. The model is solved numerically to yield steady state paths for the ratio of customers to capital, investments and price. A comparative statics analysis is carried out so as to find out how price and investments respond to exogenous shocks. The model is also tested empirically with data for the Swedish manufacturing sector. The results from the theoretical model point to a close relationship between price setting and investment decisions, which is then confirmed by the empirical investigation

Why don't prices fall in a recession? : financial constraints, investment, and customer relations

We construct a model of a financially constrained firm making pricing and investment decisions. The firm operates in a market where customers respond slowly to price changes and there are implementation lags in investment (time to build). Our model implies that the markup over marginal cost is counter-cyclical, the product price responds slowly to demand shocks, and quickly to cost shocks, and the price is strongly related to investment. Estimating the decision rules on aggregate data for Swedish industry, we find that the qualitative results are in line with our model

Why don't prices fall in a recession? : financial constraints, investment, and customer relations

We construct a model of a financially constrained firm making pricing and investment decisions. The firm operates in a market where customers respond slowly to price changes and there are implementation lags in investment (time to build). Our model implies that the markup over marginal cost is counter-cyclical, the product price responds slowly to demand shocks, and quickly to cost shocks, and the price is strongly related to investment. Estimating the decision rules on aggregate data for Swedish industry, we find that the qualitative results are in line with our model

Why don't prices fall in a recession? : financial constraints, investment, and customer relations

We construct a model of a financially constrained firm making pricing and investment decisions. The firm operates in a market where customers respond slowly to price changes and there are implementation lags in investment (time to build). Our model implies that the markup over marginal cost is counter-cyclical, the product price responds slowly to demand shocks, and quickly to cost shocks, and the price is strongly related to investment. Estimating the decision rules on aggregate data for Swedish industry, we find that the qualitative results are in line with our model