Market Concentration and Sectoral Inflation under Imperfect Common Knowledge

Ryo Kato and Tatsushi Okuda

No 17-E-11, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: We show empirical evidence that sectoral inflation persistence, measured by autocorrelation of monthly changes in US producer prices, is starkly dispersed and negatively correlated with market concentration across sectors. To account for such empirical observation, we develop a dynamic stochastic model of firms' pricing strategy in which monopolistically competitive firms set their prices while receiving private signals on cost shocks. In the model, an increase in the number of competing firms raises strategic complementarity among the firms in the same sector. Using the model, we analytically show that, under imperfect common knowledge, sectoral inflation persistence is monotonically decreasing in market concentration.

Keywords: Imperfect common knowledge; Inflation persistence; Market concentration (search for similar items in EconPapers)
JEL-codes: D40 D82 E31 L16 (search for similar items in EconPapers)
Date: 2017-12
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (9)

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