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How do market power and nominal price rigidity influence inflation
dynamics? We formulate a tractable model of oligopolistic
competition and sticky prices, and derive closed-form expressions
for the pass-through of idiosyncratic and common cost shocks to
firms’ prices. Using confidential micro data for Canadian wholesale
firms, we estimate that idiosyncratic cost pass-through is incomplete
and independent of the sector price stickiness, while common
cost pass-through declines with price stickiness. These estimates
imply a degree of strategic complementarity that lowers the
slope of the New Keynesian Phillips curve by 30% in a one-sector
model and by 64% in a multi-sector model.
