Cyclical Price Volatility: Role of Shopping Behavior and Customer Capital

Abstract

I provide an explanation for the counter-cyclical price growth dispersion. I document two facts: (1) consumers switch more across sellers during a recession, and (2) sellers set higher prices after a growth in the customer base. I propose a mechanism, in which consumers switch faster to cheap sellers during a downturn. The price growth dispersion rises, because cheap sellers increase mark-ups, while expensive sellers reduce mark-ups. I build a model with consumer search and customer base to match facts (1) and (2). The model explains 30\% of the rise in price growth dispersion during the Great Recession.