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Duopolistic competition and monetary policy

Author

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  • Kozo Ueda

Abstract

A standard macroeconomic model based on monopolistic competition (Dixit-Stiglitz) does not account for the strategic behaviors of oligopolistic firms. In this study, we construct a tractable Hotelling duopoly model with price stickiness to consider the implications for monetary policy. The key feature is that an increase in a firm's reset price increases the optimal price set by the rival firm in the following periods, which, in turn, influences its own optimal price in the current period. This dynamic strategic complementarity leads to the following results. (1) The steady-state price level depends on price stickiness. (2) The real effect of monetary policy under duopolistic competition is larger than that in a Dixit-Stiglitz model, but the difference is not large. (3) A duopoly model with heterogeneous transport costs can explain the existence of temporary sales, which decreases the real effect of monetary policy considerably. These results show the importance of understanding the competitive environment when considering the effects of monetary policy.

Suggested Citation

  • Kozo Ueda, 2021. "Duopolistic competition and monetary policy," CAMA Working Papers 2021-07, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2021-07
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    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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