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ON PRICE DYNAMICS WITH SEARCH AND BARGAINING IN THE PRODUCT MARKET
Published online by Cambridge University Press: 19 October 2020
Abstract
We introduce business-to-business (B2B) relationships into an otherwise standard model to revisit two aspects of price dynamics in a unified analysis. On one side, the pass-through of cost shocks to prices is empirically incomplete. On the other side, the literature contains conjectures that long-term relationships may reduce the allocative role of price changes. After a partial equilibrium analysis of these aspects, we consider the general equilibrium effects. The formation of B2B relationships implies that the trade of intermediate goods depends on search, bargaining, and the adjustment along the intensive margin as opposed to the extensive margin. We find that, when this adjustment is costly, retailers have a relatively high bargaining power, and mismatch shocks are possible, the model can account for the second moments of the US producer price index and other variables. In this case, although its allocative role is low, the intermediate goods price affects the allocation of goods through the search externalities and is sufficiently volatile. The analysis includes several sensitivity tests and comparisons.
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Footnotes
A previous version of this paper circulated under the title “Search and Bargaining in the Product Market and Price Rigidities.” We thank the Coeditor, Francesco Zanetti, and two anonymous referees for useful comments. We also thank Joshua Aizenman, Pierpaolo Benigno, Mikel Casares, José Enrique Galdón, Markus Kinateder, Angel Luis Lopez, Rod McCrorie, Antonio Moreno Ibañez, Andreas Mueller, Luigi Paciello, Cédric Tille, and Charles Wyplosz for insightful suggestions. We are grateful to the seminar and conference participants of the 9th “Workshop on Macroeconomic Dynamics: Theory and Policy,” the 2011 CEF in San Francisco, the 2012 RES Meeting in Cambridge, the Marshall School of Business (USC), the XXIII Finance Forum in Madrid and the III Navarre-Basque Country Workshop in Bilbao. We gratefully acknowledge the financial support received from the Spanish Ministries of Education (grants ECO2012-34595 and ECO2015-68815-P) and of Science and Innovation (grant PGC2018-098139-B-I00). Tommaso Trani thanks the Marshall School of Business and LUISS Guido Carli, where part of this research was conducted, for their kind hospitality. All remaining errors are exclusively our own.
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