English, Article, Journal or magazine article edition: Search in the Product Market and the Real Business Cycle. Thomas Y. Mathä; Olivier Pierrard

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Bookmark: http://trove.nla.gov.au/version/211552
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Search in the Product Market and the Real Business Cycle
Author
  • Thomas Y. Mathä
  • Olivier Pierrard
Physical Description
  • preprint
Notes
  • 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 procyclical 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. JEL Classification: E10, E31, E32.
  • Business cycle, Frictions, Product market, Price bargain.
  • RePEc:ecb:ecbwps:200901036
  • This paper develops a search-matching model, where producers provide effort to find customers (e.g. in form of advertising and marketing expenditures). Firms form long-term contractual relationships and bargain over prices. The price bargain results inmark up pricing above marginal cost. The size of the mark up is procyclical and depends on the relative bargaining power of producers and customers. Introducing frictions in the product market decreases the steady state equilibrium, improves the cyclical properties of the model and provides a more realistic picture of firms? business environment, which includes effort in form of advertising and price fluctuations. 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.
  • RePEc:bcl:bclwop:cahier_etude_32
Language
  • English
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