Heterogeneity in pricing behavior in hybrid DSGE-ABM macrodynamics

There is considerable evidence that pricing behavior is persistently heterogeneous across firms. We explore hybrid DSGE-ABM macrodynamics in which imperfectly competitive firms have limited information about market conditions and periodically revise (and possibly switch) their pricing strategies. Firms choose a pricing heuristic out of a set of alternatives including a cost-based heuristic with a standard markup, a cost-based heuristic with a quality-adjusted markup, and a heuristic of following the pricing behavior of competitors. For merely illustrative purposes, we employ the method of simulated moments to calibrate the model with quarterly data for the U.S. economy. The model qualitatively reproduces several stylized facts concerning the strategic pricing behavior of firms, such as the persistence of heterogeneity in pricing heuristics and price stickiness. Thus, embedding some tenets of the agent-based modeling (ABM) approach, such as that interacting heterogeneous firms evolutionarily learn and adapt to the environment, into a dynamic stochastic general equilibrium (DSGE) model allows it to qualitatively reproduce to a considerable extent the persistent heterogeneity in pricing behavior across firms without compromising its ability to also reproduce several stylized macroeconomic facts.