Working Paper: NBER ID: w27389
Authors: Elhanan Helpman; Benjamin C. Niswonger
Abstract: We develop a model with a finite number of multi-product firms that populate an industry together with a continuum of single product firms, and study the dynamics of this industry that arises from investments in the invention of new products. Consistent with the available evidence, the model predicts rising markups and concentration and a declining labor share. We then examine the dynamics of market shares and product spans in response to improvements in the technologies of the multi-product and single product firms, and the impact of these changes on the steady state distribution of market shares and product spans. Our model predicts the possibility of an inverted-U relationship between labor productivity and product span in the cross-section of firms, for which we provide suggestive evidence. It also predicts that rising entry costs of single-product firms may flatten the relationship between labor productivity and market shares of the large multi-product firms.
Keywords: markups; concentration; product span; innovation; labor share
JEL Codes: D43; L11; L13; L25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| investments in the invention of new products by multiproduct firms (O31) | rising markups (D43) |
| investments in the invention of new products by multiproduct firms (O31) | concentration in the industry (L19) |
| investments in the invention of new products by multiproduct firms (O31) | labor share declines (E25) |
| improvements in technology for single-product firms (L23) | competitive pressure on multiproduct firms (L11) |
| competitive pressure on multiproduct firms (L11) | decline in market share of large firms (L19) |
| competitive pressure on multiproduct firms (L11) | increases in product spans of large firms (L25) |
| competitive pressure on multiproduct firms (L11) | increases in market shares of large firms (L19) |
| labor productivity increases (J24) | greater product span (L15) |
| greater product span (L15) | labor productivity decreases beyond a certain point (J29) |