General Equilibrium with Customer Relationships: A Dynamic Analysis of Rent-Seeking

U.S. businesses spend almost $300 billion a year on advertising. The goal of the spending is to attract loyal customers. The relationship capital associated with the resulting loyalty earns substantial rents for businesses and also some rents for customers. Businesses and households pursue those rents. I build a model of the development and valuation of customer relationships and of the resulting effects on the allocation of time within households. Shopping occupies about six hours per week for the average American adult. A small part of that time is search for new relationships with merchants and the bulk is buying goods and services and bringing them home. Influences on the profit margins of sellers—such as variations in productivity—have profound effects on the tightness of retail markets and on the allocation of time in the household. The model tracks data in the American Time Use Survey during the expansion from 2003 to 2006. The model implies that spending on advertising and spending on recruiting workers move in parallel over the business cycle. This implication is strikingly confirmed in data on advertising and the labor market. ∗This paper is part of the Economic Fluctuations and Growth program of the National Bureau of Economic Research. I am grateful to members of the program’s RSW group and to Alan Kackmeister for comments. Data, programs, and an extended version of this paper with derivations are available at my website.