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Firm Size, Heterogeneous Strategic Complementarities, and Real Rigidity


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.

JEL Classification: E31; E52; L11;

https://doi.org/10.26509/frbc-wp-202514r

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Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers

Publication Date: 2025-11-25

Number: 25-14R

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