Duopolistic competition and monetary policy

Kozo Ueda

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: A standard macroeconomic model based on monopolistic competition (Dixit-Stiglitz) does not account for the strategic behaviors of oligopolistic firms. In this study, we construct a tractable Hotelling duopoly model with price stickiness to consider the implications for monetary policy. The key feature is that an increase in a firm’s reset price increases the optimal price set by the rival firm in the following periods, which, in turn, influences its own optimal price in the current period. This dynamic strategic complementarity leads to the following results. (1) The steady-state price level depends on price stickiness. (2) The real effect of monetary policy under duopolistic competition is larger than that in a Dixit-Stiglitz model, but the difference is not large. (3) A duopoly model with heterogeneous transport costs can explain the existence of temporary sales, which decreases the real effect of monetary policy considerably. These results show the importance of understanding the competitive environment when considering the effects of monetary policy.

Keywords: Duopoly; monetary policy; strategic complementarities; New Keynesian model (search for similar items in EconPapers)
JEL-codes: D43 E32 E52 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2021-01
New Economics Papers: this item is included in nep-com, nep-dge, nep-mac and nep-mon
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Related works:
Journal Article: Duopolistic competition and monetary policy (2023)
Working Paper: Duopolistic Competition and Monetary Policy (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2021-07

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