IDEAS home Printed from https://ideas.repec.org/p/ime/imedps/17-e-11.html
   My bibliography  Save this paper

Market Concentration and Sectoral Inflation under Imperfect Common Knowledge

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://www.imes.boj.or.jp/research/papers/english/17-E-11.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
    2. Adam, Klaus, 2007. "Optimal monetary policy with imperfect common knowledge," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 267-301, March.
    3. Nimark, Kristoffer, 2008. "Dynamic pricing and imperfect common knowledge," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 365-382, March.
    4. Virgiliu Midrigan, 2011. "Menu Costs, Multiproduct Firms, and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 79(4), pages 1139-1180, July.
    5. Angeletos, George-Marios & La’O, Jennifer, 2009. "Incomplete information, higher-order beliefs and price inertia," Journal of Monetary Economics, Elsevier, vol. 56(S), pages 19-37.
    6. Manuel Amador & Pierre-Olivier Weill, 2010. "Learning from Prices: Public Communication and Welfare," Journal of Political Economy, University of Chicago Press, vol. 118(5), pages 866-907.
    7. Olivier Coibion & Yuriy Gorodnichenko, 2012. "What Can Survey Forecasts Tell Us about Information Rigidities?," Journal of Political Economy, University of Chicago Press, vol. 120(1), pages 116-159.
    8. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1295-1328.
    9. Mankiw, N Gregory, 2001. "The Inexorable and Mysterious Tradeoff between Inflation and Unemployment," Economic Journal, Royal Economic Society, vol. 111(471), pages 45-61, May.
    10. Jean Boivin & Marc P. Giannoni & Ilian Mihov, 2009. "Sticky Prices and Monetary Policy: Evidence from Disaggregated US Data," American Economic Review, American Economic Association, vol. 99(1), pages 350-384, March.
    11. Olivier Coibion & Yuriy Gorodnichenko, 2015. "Information Rigidity and the Expectations Formation Process: A Simple Framework and New Facts," American Economic Review, American Economic Association, vol. 105(8), pages 2644-2678, August.
    12. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    13. Kiyohiko G. Nishimura, 1986. "Rational Expectations and Price Rigidity in a Monopolistically Competitive Market," Review of Economic Studies, Oxford University Press, vol. 53(2), pages 283-292.
    14. Takashi Ui, 2009. "Bayesian potentials and information structures: Team decision problems revisited," International Journal of Economic Theory, The International Society for Economic Theory, vol. 5(3), pages 271-291.
    15. Todd E. Clark, 2006. "Disaggregate evidence on the persistence of consumer price inflation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(5), pages 563-587.
    16. Lahiri, Kajal & Sheng, Xuguang, 2008. "Evolution of forecast disagreement in a Bayesian learning model," Journal of Econometrics, Elsevier, vol. 144(2), pages 325-340, June.
    17. Bill Dupor & Tomiyuki Kitamura & Takayuki Tsuruga, 2010. "Integrating Sticky Prices and Sticky Information," The Review of Economics and Statistics, MIT Press, vol. 92(3), pages 657-669, August.
    18. Ichiro Fukunaga, 2007. "Imperfect Common Knowledge, Staggered Price Setting, and the Effects of Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(7), pages 1711-1739, October.
    19. George-Marios Angeletos & Alessandro Pavan, 2007. "Efficient Use of Information and Social Value of Information," Econometrica, Econometric Society, vol. 75(4), pages 1103-1142, July.
    20. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, Oxford University Press, vol. 123(4), pages 1415-1464.
    21. Takashi Ui & Yasunori Yoshizawa, 2013. "Radner's Theorem on Teams and Games with a Continuum of Players," Economics Bulletin, AccessEcon, vol. 33(1), pages 72-77.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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," IMES Discussion Paper Series 17-E-09, Institute for Monetary and Economic Studies, Bank of Japan.

    More about this item

    Keywords

    Imperfect common knowledge; Inflation persistence; Market concentration;

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ime:imedps:17-e-11. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kinken). General contact details of provider: http://edirc.repec.org/data/imegvjp.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.