Interactions Between Price Setting and Capital Investment in a Customer Market

In this essay a customer market model is constructed, where an entrepreneur-owned firm has two choice variables, namely the customer stock and the capital stock. The firm is assumed to be completely credit rationed and the investment procedure is characterised by time-to-build. The model is solved numerically to yield steady state paths for the ratio of customers to capital, investments and price. A comparative statics analysis is carried out so as to find out how price and investments respond to exogenous shocks. The model is also tested empirically with data for the Swedish manufacturing sector. The results from the theoretical model point to a close relationship between price setting and investment decisions, which is then confirmed by the empirical investigation.