Big Data

Customer Capital

Download Now Date Added: Jul 2011
Format: PDF

Firms spend substantial resources on marketing and selling. Interpreting this as evidence of frictions in product markets, which require firms to spend resources on customer acquisition, this paper develops a search theoretic model of firm dynamics in frictional product markets. Introducing search frictions generates long-term customer relationships, rendering the customer base a state variable for firms, which is sluggish to adjust. This affects: the level and volatility of firm investment, sales, profits, value and markups, the timing of firm responses to shocks, and the relationship between investment and Tobin's q.