Working Paper

Firm Size, Heterogeneous Strategic Complementarities, and Real Rigidity

Abstract: Recent research indicates substantial differences in price-setting behavior between small and large firms, as only large firms exhibit strategic complementarities in price setting. Using firm survey data, we present new evidence that the cost-price pass-through decreases 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, there is little such rigidity in our model. Heterogeneity in strategic complementarity by firm size weakens real rigidity because large firms that exhibit strategic complementarities bring their product prices in line with those of small firms that more fully pass through cost changes. Our findings challenge the notion of strategic complementarity as a source of real rigidity in DSGE models.

JEL Classification: E31; E52; L11;

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

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers

Publication Date: 2025-06-02

Number: 25-14