Working Paper: NBER ID: w20436
Authors: Colin Hottman; Stephen J. Redding; David E. Weinstein
Abstract: We develop and structurally estimate a model of heterogeneous multiproduct firms that can be used to decompose the firm-size distribution into the contributions of costs, “appeal” (quality or taste), markups, and product scope. Using Nielsen bar-code data on prices and sales, we find that variation in firm appeal and product scope explains at least four fifths of the variation in firm sales. We show that the imperfect substitutability of products within firms, and the fact that larger firms supply more products than smaller firms, implies that standard productivity measures are highly dependent on implicit demand system assumptions and probably dramatically understate the relative productivity of the largest firms. Although most firms are well approximated by the monopolistic competition benchmark of constant markups, we find that the largest firms that account for most of aggregate sales depart substantially from this benchmark, and exhibit both variable markups and substantial cannibalization effects.
Keywords: Firm heterogeneity; Multiproduct firms; Product scope; Market power; Consumer appeal
JEL Codes: D24; F12; F14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| variation in firm appeal and product scope (L25) | variation in firm sales (L25) |
| differences in firm appeal (L25) | variance in firm size (L25) |
| product scope (L68) | variance in firm size (L25) |
| cost (D61) | variance in firm size (L25) |
| largest firms (L25) | variable markups (D46) |
| largest firms (L25) | substantial cannibalization effects (D16) |
| cannibalization effects (D16) | standard productivity measures (D20) |
| CES measure of price (E30) | product differentiation (L15) |
| real output variation (E23) | nominal output variation (E23) |
| structural model (E10) | quantifying product differentiation (L15) |
| typical firm (D21) | cannibalization rate (D26) |