Search and Bargaining in the Product Market and Price Rigidities

Abstract

This paper develops a model of pricing dynamics in business to business relationships. The formation of business relationships is a process of search and matching between retailers and wholesalers in the product market. The size of each transaction and the related price are set through bilateral bargaining. There are three key factors that influence the reaction of prices and quantities to cost shocks: the persistence of the shocks, the adjustment of final goods production and the search externalities. These factors determine how firms adjust, whether through the intensive margin, through the extensive margin or through both. Based on this, we assess to what extent wholesale prices affect the allocation of consumption in closed economy and deliver expenditure switching in open economy.

Long-term business relationships, bargaining and monetary policy

“…Our calibration of the search and matching with bargaining follows largely the strategy developed by Abbritti and Trani (2017). This is based on survey interviews to business managers from various sectors of the U.S. economy and on survey data on employment in sales-related activities.…”

“…Mathä and Pierrard (2011) introduce two-sided search and matching between wholesalers and retailers into the standard RBC model to study the effect of long-term relationships on business cycle dynamics. Abbritti and Trani (2017) study incomplete pass-through and the allocative power of intermediate goods prices in a model with product market frictions and bargaining over intermediate prices and quantities.…”

“…See alsoAbbritti and Trani (2017) for a discussion. 2 To allow comparability between the two models, the benchmark New Keynesian model also has two sectors, a wholesale and retail sector, and sticky intermediate prices…”

“…In a model that abstracts from nominal price rigidity and endogenous destruction,Abbritti and Trani (2017) show that one can choose η to approximate the volatility of the PPI in the data, with little consequence for the other moments.…”