Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/183346
Authors: 
Duca, Ioana A.
Montero, José Manuel
Riggi, Marianna
Zizza, Roberta
Year of Publication: 
2018
Series/Report no.: 
ECB Working Paper 2164
Abstract: 
We consider a standard result of customer market theory: if firms have stable customer relations and face financial frictions, they may keep prices relatively high on their locked-in shoppers to maintain short-term profits at the expense of future market shares in times of low demand and vice versa in times of high demand. We extend this theoretical framework so that the countercyclical behaviour of price margins is strengthened by the expected persistence of demand and the procyclicality of competitive pressures. We test these predictions for Italian firms participating in the 2014 Wage Dynamics Network Survey. All things being equal, financially constrained firms charge higher markups when faced with low demand; this behaviour is more evident when demand is perceived as being persistent. Our findings suggest that the severity of financial constraints in Italy was one of the causes of the sustained growth of prices in 2010-2013.
Subjects: 
markups
fiancial frictions
customer market
JEL: 
C25
C26
D22
L11
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-3269-1
Document Type: 
Working Paper
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