IMF Working Papers

Beyond Costs: The Dominant Role of Strategic Complementarities in Pricing

By Elías Albagli, Francesco Grigoli, Emiliano Luttini, Dagoberto Quevedo, Marco Rojas

August 15, 2025

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Format: Chicago

Elías Albagli, Francesco Grigoli, Emiliano Luttini, Dagoberto Quevedo, and Marco Rojas. "Beyond Costs: The Dominant Role of Strategic Complementarities in Pricing", IMF Working Papers 2025, 164 (2025), accessed August 22, 2025, https://doi.org/10.5089/9798229019194.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper documents five empirical facts about the role of strategic complementarities in firms’ price-setting behavior, using administrative data from Chilean firms. (1) Strategic complementarities play a dominant role in price setting, exerting a stronger influence than changes in marginal costs. (2) While the strength of strategic complementarities varies across sectors, they consistently outweigh the role of cost changes. (3) In high-inflation environments, firms become more responsive to changes in the prices of their competitors. (4) Firms respond more strongly to competitor price increases than to decreases, mirroring the `rockets and feathers' phenomenon of costs. (5) Strategic complementarities are stronger among firms with fewer competitors, larger market shares, and broader customer bases. These findings suggest that strategic complementarities---a source of real rigidities---are sizable, state-dependent, asymmetric, and shaped by market structure.

Subject: Consumer price indexes, Deflation, Economic sectors, Inflation, Manufacturing, Price adjustments, Prices, Producer price indexes, Sticky prices

Keywords: Consumer price indexes, Deflation, Inflation, Manufacturing, Market structure, Pass-through, Price adjustments, Price setting, Producer price indexes, State dependency, Sticky prices, Strategic complementarities

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