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Firm Size, Heterogeneous Strategic Complementarities, and Real Rigidity

Author

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  • Takushi Kurozumi
  • Willem Van Zandweghe

Abstract

Recent research finds that only large firms exhibit strategic complementarities in price setting. Using firm survey data, we show that cost pass-through decreases significantly 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, such rigidity is much weaker in our model. Large firms that exhibit complementarities align their prices with those of small firms that more fully pass through costs. Our findings challenge the notion of strategic complementarity as a source of real rigidity.

Suggested Citation

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

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    1. 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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