How do Firms Grow? The Life Cycle of Products Matters

We exploit detailed product- and firm-level data to study the size of firms and products over their life cycles. We build a dataset that contains information on the product portfolio of each firm in the consumer goods sector over the period 2006-2015. We document that, with the exception of the first few quarters, sales of products decline at a steady pace throughout most of their life cycle. These dynamics are robust across very heterogenous types of products, and contrast with the profile of firms, which grow throughout most of their life cycle. Motivated by these results, we create a statistical framework of firm growth as a function of the vintages of products. Using this decomposition we quantify, for young and mature firms, the importance of new product introduction (both the intensive and extensive margins) and the impact of decreasing sales of older vintages. We find that firms must grow by continuously adding products that generate sufficiently large revenue in order to compensate the reduction in revenue accruing from previous vintages of products. We structurally estimate a model of heterogeneous multiproduct firms and decompose sales over the life cycle of the product to understand the mechanisms behind their decline. Our results indicate that demand-side factors are behind the decline in sales of products and are consistent with preferences for newer vintages of products.