ESRI Discussion Paper Series No.359 Sectoral inflation persistence, market concentration and imperfect common knowledge

Ryo Kato
Graduate School of Public Policy, The University of Tokyo
Tatsushi Okuda
Economic and Social Research Institute, Cabinet Office, Japan
Takayuki Tsuruga
Institute of Social and Economic Research, Osaka University


Previous studies have stressed that inflation dynamics exhibit a substantial dispersion across sectors. Using US producer price data, we present evidence that sectoral inflation persistence is negatively correlated with market concentration, which is difficult to reconcile with the prediction of the standard model of monopolistic competition. To explain the data, we incorporate imperfect common knowledge into the monopolistic competition model introduced by Melitz and Ottaviano (2008). In the model, pricing complementarity among firms increases as market concentration decreases. Because higher pricing complementarity generates greater inflation persistence, our model successfully replicates the observed negative correlation between inflation persistence and market concentration across sectors.

Keywords: nformation rigidity,Disaggregated prices,Market structure

Structure of the whole text(PDF-Format 1 File)

    • page2
      1. Introduction
    • page4
      2. Evidence
    • page7
      3. The basic model
    • page13
      4. The extended model
    • page17
      5. An alternative approach: The Calvo model
    • page18
      6. Conclusion