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Beyond Costs: The Dominant Role of Strategic Complementarities in Pricing

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  • Elías Albagli
  • Mr. Francesco Grigoli
  • Emiliano Luttini
  • Dagoberto Quevedo
  • Marco Rojas

Abstract

This paper documents five empirical facts about the role of strategic complementarities in firms’ price-setting behavior, using administrative data from Chilean firms. (1) Strategic complementarities play a dominant role in price setting, exerting a stronger influence than changes in marginal costs. (2) While the strength of strategic complementarities varies across sectors, they consistently outweigh the role of cost changes. (3) In high-inflation environments, firms become more responsive to changes in the prices of their competitors. (4) Firms respond more strongly to competitor price increases than to decreases, mirroring the `rockets and feathers' phenomenon of costs. (5) Strategic complementarities are stronger among firms with fewer competitors, larger market shares, and broader customer bases. These findings suggest that strategic complementarities---a source of real rigidities---are sizable, state-dependent, asymmetric, and shaped by market structure.

Suggested Citation

  • Elías Albagli & Mr. Francesco Grigoli & Emiliano Luttini & Dagoberto Quevedo & Marco Rojas, 2025. "Beyond Costs: The Dominant Role of Strategic Complementarities in Pricing," IMF Working Papers 2025/164, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2025/164
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