Friday, October 11, 2013
Shouyong Shi (University of Toronto) has written on Customer Relationship and Sales.
ABSTRACT: I analyze a search equilibrium of a large market where customer relationship arises endogenously together with service priority and sales. A buyer is related to a seller if he just purchased from the seller, and the relationship is broken if the buyer fails to buy from the seller. I prove that there exists a unique equilibrium where it is optimal for a buyer to make repeat purchases from the related seller and optimal for a seller to give service priority to the related buyer. Moreover, a related seller posts a (high) regular price, and an unrelated seller posts a (low) sale price with the intention to revert to the regular price once he gains a relationship. The fraction of related sellers is endogenous. I examine how market conditions affect the stock of relationships, markups, the size and the duration of a sale.