Working Paper: CEPR ID: DP14881
Authors: Elhanan Helpman; Benjamin Niswonger
Abstract: We develop a model with a finite number of multi-product firms that populate an industrytogether with a continuum of single-product firms, and study the dynamics of this industrythat arises from investments in the invention of new products. Consistent with the availableevidence, the model predicts rising markups and concentration and a declining labor share. Wethen examine the dynamics of market shares and product spans in response to improvements inthe technologies of the multi-product and single-product firms, and the impact of these changeson the steady state distribution of market shares and product spans. Our model predicts thepossibility of an inverted-U relationship between labor productivity and product span in thecross-section of firms, for which we provide suggestive evidence. It also predicts that risingentry costs of single-product firms may flatten the relationship between labor productivity andmarket shares of the large multi-product firms.
Keywords: single and multiproduct firms; firm dynamics; industry dynamics; markup; market share; product span
JEL Codes: L11; L13; L25; D43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Investment in innovation (O35) | Rising markups and concentration (D43) |
| Technological improvements (O33) | Changes in market shares and product spans (L17) |
| Labor productivity (O49) | Product span (L68) |
| Labor productivity (O49) | Decrease in product span (D24) |
| Entry costs (L11) | Reduced competition (L49) |
| Reduced competition (L49) | Affect on productivity and market shares (F61) |