Product-Level Efficiency and Core Competence in Multi-Product Plants

A growing literature examines trade-related dynamics at the product-level within firms or plants. Product-level efficiency is a key theoretical component, and so is the ranking of products by "core competence." However, data limitations make it difficult to construct product-level efficiency, and productivity patterns across products within plants are largely unexplored. We exploit a uniquely detailed Chilean dataset that allows us to compute several alternative efficiency measures (such as marginal costs, revenue productivity, physical efficiency, and marginal costs), for each product within plants. We present novel stylized facts in three areas. First, on product-level efficiency patterns, we show that productive plants tend to be relatively efficient across the board, not just for their core products. Second, we show that the typically used sales-based product ranks correctly reflect higher physical efficiency (TFPQ); however – seemingly contradictory – marginal costs are higher for top-ranked sales products. We show that this discrepancy is likely driven by product quality and present a stylized model that underlines the importance of the ranking variable. Finally, using the prominent metric of export skewness towards core products, we highlight the importance of using the appropriate ranking variable when testing predictions of flexible manufacturing models. Product ladders based on marginal costs or revenue productivity do not show export skewness, while TFPQ-based rankings do yield skewness towards the most efficient product and thus aggregate efficiency gains from trade.