Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153470
Authors: 
Mathä, Thomas Y.
Pierrard, Olivier
Year of Publication: 
2009
Series/Report no.: 
ECB Working Paper 1036
Abstract: 
We develop a search-matching model, where firms search for customers (e.g. in form of advertising). Firms use long-term contracts and bargain over prices, resulting in a price mark up above marginal cost, which is pro- cyclical and depends on firms’ relative bargaining power. Product market frictions decrease the steady state equilibrium, improve the cyclical properties of the model and provide a more realistic picture of firms’ business environment. This suggests that product market frictions may well be crucial in explaining business cycle fluctuations. Finally, we also show that welfare costs of price rigidities are negligible relative to welfare costs of frictions.
Subjects: 
business cycle
Frictions
Price bargain
product market
JEL: 
E10
E31
E32
Document Type: 
Working Paper

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