This study investigates how strategic and heterogeneous price setting influences the real effect of monetary policy. Japanese data show that firms with larger market shares exhibit more frequent and larger price changes than those with smaller market shares. We then construct an oligopolistic competition model with sticky prices and asymmetry in terms of competitiveness and price stickiness, which shows that a positive cross superelasticity of demand generates dynamic strategic complementarity, resulting in decreased price adjustments and an amplified real effect of monetary policy. Whether a highly competitive firm sets its price more sluggishly and strategically than a less competitive firm depends on the shape of the demand system, and the empirical results derived from the Japanese data support Hotelling’s model rather than the constant elasticity of substitution preferences model. Dynamic strategic complementarity and asymmetry in price stickiness can substantially enhance the real effect of monetary policy.
The COVID-19 pandemic has resulted in a resurgence of inflation, which some policymakers and scholars attribute to a surge in firms’ markups.1 The upward trajectory of market oligopoly and markups over the past few decades may have contributed to the inflationary upswing. In contrast, Japan’s inflation has remained low relative to other countries, with firms frequently attributing this phenomenon to the presence of other firms with inflexible pricing policies. These findings underscore the importance of considering strategic price setting in an oligopolistic market, yet macroeconomic analyses in this area are limited due to the predominance of monopolistic competition in macroeconomic models, despite strategic complementarity in price setting being a major source of real rigidity (Romer 2001, Woodford 2003). Furthermore, while markups are increasing, their development is not uniform across firms, and heterogeneity, such as the emergence of superstar firms, cannot be ignored.