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Firm Size, Heterogeneous Strategic Complementarities, and Real Rigidity

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  • Takushi Kurozumi
  • Willem Van Zandweghe

Abstract

Recent research indicates substantial differences in price-setting behavior between small and large firms, as only large firms exhibit strategic complementarities in price setting. Using firm survey data, we present new evidence that the cost-price pass-through decreases with firm size. To examine the implications for inflation dynamics, we develop a DSGE model that features heterogeneous complementarities across firm size. While standard DSGE models with homogeneous firms generate real rigidity in relative prices, there is little such rigidity in our model. Heterogeneity in strategic complementarity by firm size weakens real rigidity because large firms that exhibit strategic complementarities bring their product prices in line with those of small firms that more fully pass through cost changes. Our findings challenge the notion of strategic complementarity as a source of real rigidity in DSGE models.

Suggested Citation

  • Takushi Kurozumi & Willem Van Zandweghe, 2025. "Firm Size, Heterogeneous Strategic Complementarities, and Real Rigidity," Working Papers 25-14, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwq:100041
    DOI: 10.26509/frbc-wp-202514
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    References listed on IDEAS

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    1. Bu, Chunya & Rogers, John & Wu, Wenbin, 2021. "A unified measure of Fed monetary policy shocks," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 331-349.
    2. Lucia Foster & John Haltiwanger & Chad Syverson, 2008. "Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?," American Economic Review, American Economic Association, vol. 98(1), pages 394-425, March.
    3. Thomas J. Holmes & John J. Stevens, 2014. "An Alternative Theory of the Plant Size Distribution, with Geography and Intra- and International Trade," Journal of Political Economy, University of Chicago Press, vol. 122(2), pages 369-421.
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    More about this item

    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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