Product Market Frictions, Bargaining and Pass-Through
Materias Investigacion::Economía y Empresa
Price dynamics
Product market frictions
Price bargain
Customer relations
Real rigidities
Incomplete pass-through
Issue Date: 
Abbritti, M. (Mirko). "Product Market Frictions, Bargaining and Pass-Through". En . , 2012,
Empirical evidence shows that the pass-through of cost shocks to prices is very low, and delayed. This is in stark contrast with the standard framework of monopolistic competition used in macro models, which, absent nominal rigidities, implies complete pass-through of cost shocks to prices. This paper develops a model of pricing dynamics in business to business relationships where incomplete pass-through arises endogenously. The model is based on two assumptions. First, both retailers and wholesalers invest resources to form new, long-term, business relationships. Second, once a business relationship is formed, the prices and the quantities of the intermediate good exchanged are set in a bilateral bargaining between wholesalers and retailers. The repeated nature of the interactions between firms raises the question of whether wholesale prices are allocative. We show that wholesale prices still play an allocative role in the model, but this role is likely to be quite limited.

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