Working Paper: CEPR ID: DP8349
Authors: Thierry Mayer; Marc J. Melitz; Gianmarco Ireo; Paolo Ottaviano
Abstract: We build a theoretical model of multi-product firms that highlights how market size and geography (the market sizes of and bilateral economic distances to trading partners) affect both a firm's exported product range and its exported product mix across market destinations (the distribution of sales across products for a given product range). We show how tougher competition in an export market induces a firm to skew its export sales towards its best performing products. We find very strong confirmation of this competitive effect for French exporters across export market destinations. Trade models based on exogenous markups cannot explain this strong significant link between destination market characteristics and the within-firm skewness of export sales (after controlling for bilateral trade costs). Theoretically, this within firm change in product mix driven by the trading environment has important repercussions on firm productivity and how it responds to changes in that trading environment.
Keywords: competition; markups; multiproduct firms; product mix
JEL Codes: F12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tougher competition (L19) | downward shift in the distribution of markups (D39) |
| downward shift in the distribution of markups (D39) | skewing of export sales towards best performing products (F10) |
| tougher competition (L19) | skewing of export sales towards best performing products (F10) |
| tougher competition (L19) | dropping of worst performing products (L15) |
| dropping of worst performing products (L15) | increase in productivity (O49) |
| tougher competition (L19) | increase in productivity (O49) |