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Working Paper

Firm Size, Heterogeneous Strategic Complementarities, and Real Rigidity

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.

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Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.


Suggested Citation

Kurozumi, Takushi, and Willem Van Zandweghe. 2025. “Firm Size, Heterogeneous Strategic Complementarities, and Real Rigidity.” Federal Reserve Bank of Cleveland, Working Paper No. 25-14. https://doi.org/10.26509/frbc-wp-202514