Price Setting with Customer Capital: Sales, Teasers, and Rigidity

This paper studies price setting in an equilibrium search model of frictional product markets with long-term customer relationships. The theory gives rise to temporary sales when pricing is constrained to be anonymous across a firm’s customer base. Equilibrium prices are inefficiently high, giving rise to overselling and excess trade, and the emergence of sale pricing can improve allocations by limiting this overselling. Pricing is also characterized by an asymmetry involving a stable regular price and variable sale price when firms face idiosyncratic shocks. Absent anonymous pricing, the theory gives rise to teaser pricing, which attains efficient allocations. Teaser pricing is also characterized by a stable regular price and variable teaser price, but in this case the seeming rigidity is not allocative.