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  4. August 2022
  5. Dynamic Oligopoly and Price Stickiness

Dynamic Oligopoly and Price Stickiness

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Abstract

How does market concentration affect the potency of monetary policy? To address this question we embed a dynamic oligopolistic game into a general-equilibrium macroeconomic model. We provide a sufficient-statistic formula for the response to monetary shocks involving demand elasticities, concentration and markups. We discipline our model with evidence on pass-through and find that higher concentration amplifies nonneutrality and stickiness. We isolate strategic effects from oligopoly by comparing our model to one with naive firms. We derive an exact Phillips curve featuring novel higher-order terms, but show that a standard New Keynesian one recalibrated with higher stickiness provides an excellent approximation.

Citation

Wang, Olivier, and Iván Werning. 2022. "Dynamic Oligopoly and Price Stickiness." American Economic Review, 112 (8): 2815-49. DOI: 10.1257/aer.20201739

Additional Materials

JEL Classification

  • D43 Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection
  • E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian
  • E21 Macroeconomics: Consumption; Saving; Wealth
  • E31 Price Level; Inflation; Deflation
  • E43 Interest Rates: Determination, Term Structure, and Effects
  • E51 Money Supply; Credit; Money Multipliers
  • E52 Monetary Policy