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Market Concentration and Sectoral Inflation under Imperfect Common Knowledge

Author

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  • Ryo Kato

    (Head of Economic Studies Group, Institute for Monetary and Economic Studies (currently Head of Global Economic Research Division, International Department), Bank of Japan (E-mail: ryou.katou@boj.or.jp))

  • Tatsushi Okuda

    (Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: tatsushi.okuda@boj.or.jp))

Abstract

We show empirical evidence that sectoral inflation persistence, measured by autocorrelation of monthly changes in US producer prices, is starkly dispersed and negatively correlated with market concentration across sectors. To account for such empirical observation, we develop a dynamic stochastic model of firms' pricing strategy in which monopolistically competitive firms set their prices while receiving private signals on cost shocks. In the model, an increase in the number of competing firms raises strategic complementarity among the firms in the same sector. Using the model, we analytically show that, under imperfect common knowledge, sectoral inflation persistence is monotonically decreasing in market concentration.

Suggested Citation

  • Ryo Kato & Tatsushi Okuda, 2017. "Market Concentration and Sectoral Inflation under Imperfect Common Knowledge," IMES Discussion Paper Series 17-E-11, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:17-e-11
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    File URL: http://www.imes.boj.or.jp/research/papers/english/17-E-11.pdf
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    References listed on IDEAS

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    Cited by:

    1. Tatsushi Okuday & Tomohiro Tsurugaz & Francesco Zanetti, 2019. "Imperfect Information, Shock Heterogeneity, and Inflation Dynamics," BCAM Working Papers 1906, Birkbeck Centre for Applied Macroeconomics.
    2. Matteo G. Richiardi & Luis Valenzuela, 2024. "Firm heterogeneity and the aggregate labour share," LABOUR, CEIS, vol. 38(1), pages 66-101, March.
    3. Tatsushi Okuda & Tomohiro Tsuruga & Francesco Zanetti, 2021. "Imperfect information, heterogeneous demand shocks, and inflation dynamics," CAMA Working Papers 2021-29, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    4. Ko Nakayama & Shigenori Shiratsuka, 2017. "Monetary Policy: Lessons Learned and Challenges Ahead Summary of the 2017 BOJ-IMES Conference Organized by the Institute for Monetary and Economic Studies of the Bank of Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 35, pages 1-16, November.

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    More about this item

    Keywords

    Imperfect common knowledge; Inflation persistence; Market concentration;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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