Download This PaperComments on “Strategic Complementarity and Asymmetric Price Setting Among Firms”
4 Pages Posted: 17 Apr 2020
Date Written: March 25, 2020
Abstract
Koga et al (2019) is an interesting, well written and timely paper based on data from quarterly Tankan surveys covering around 10,000 firms in Japan between 2004 and 2017. Although the paper contains a number of secondary findings, there are five key findings. First, firms’ pricing decisions exhibit strategic complementarity, in that they are affected by the pricing decisions of competitor firms. Second, this complementarity is asymmetrically stronger when prices decline, a finding the authors attribute to the existence of kinked demand. Third, higher inflation expectations raise the likelihood of any given firm raising its own price. Fourth, firms with a larger market share exhibit much less sensitivity to competitors’ price changes. And finally, firms that report a higher degree of uncertainty delay price changes, an evidence of “wait and see” behaviour. The overall contribution here is one of more details on the state-dependent nature of price changes.
In their well written paper with a thorough literature review, the authors work hard to link the empirical estimations to the theoretical model in Dotsey and King (2005), in which a firm’s price relative to the overall price level depends on a number of characteristics of the market environment. Koga et al (2019) further log-linearise the pricing equation of Dotsey and King (2005). Although this is not a structural equation in the sense of mapping prices to some fundamental drivers (instead, the prices depend on costs, labour costs, local demand, and the prices of competitors), Koga et al (2019) use it to derive their empirical model to bring to the data. Because the prices are not observed in the Tankan survey, the authors use a limited dependent model (ordered probit).
Full Publication: Inflation Dynamics in Asia and the Pacific
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