Customer relationship and sales

In a large market where sellers post the terms of trade to direct search, I prove that customer relationships arise endogenously in the equilibrium as buyers make repeat purchases and sellers give priority to repeat trades. When the buyer–seller ratio is low, the equilibrium is separating between related and unrelated individuals. When the buyer–seller ratio is high, the equilibrium is partially mixing because a newly related seller attracts both the related buyer and unrelated buyers. Customer relationships improve welfare by reducing coordination frictions and helping sellers learn about the related buyer's utility. However, an equilibrium is constrained efficient only when it is separating and when the buyer–seller ratio is low. Moreover, customer relationships induce microprice dynamics, including sales, even when market conditions are constant. I examine how market conditions affect markups, the frequency and the sale duration, both analytically and in a calibrated example.