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Productivity and the product scope of multi-product firms: A test of Feenstra-Ma

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  • Raff, Horst
  • Wagner, Joachim

Abstract

Feenstra and Ma (2008) develop a monopolistic competition model where firms choose their optimal product scope by balancing the profits from a new variety against the costs of 'cannibalizing' sales of existing varieties. While more productive firms always have a higher market share, there is no monotonic relationship between firms' productivity level and their choices of product scope. In the model having a higher market share means that firms are hurt more by the 'cannibalization effect'. Therefore, the incentive to add more products weakens as productivity rises. This leads to Lemma 3 in Feenstra and Ma (2008): There is an inverted U-shaped relationship between firms' productivities and the range of varieties they choose to produce. This empirical note takes this Lemma to the data for firms from German manufacturing industries. Empirical evidence is in line with the results from the theoretical model.

Suggested Citation

  • Raff, Horst & Wagner, Joachim, 2012. "Productivity and the product scope of multi-product firms: A test of Feenstra-Ma," Kiel Working Papers 1814, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwkwp:1814
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    5. repec:hal:wpspec:info:hdl:2441/c8dmi8nm4pdjkuc9g8m210prh is not listed on IDEAS
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    Cited by:

    1. Macedoni, Luca, 2022. "Large multiproduct exporters across rich and poor countries: Theory and evidence," Journal of Development Economics, Elsevier, vol. 156(C).
    2. Robert C. Feenstra & Mingzhi Xu & Alexis Antoniades, 2017. "What is the Price of Tea in China? Towards the Relative Cost of Living in Chinese and U.S. Cities," NBER Working Papers 23161, National Bureau of Economic Research, Inc.
    3. Dary, Stanley K. & James, Harvey S., 2019. "Does investment in trade credit matter for profitability? Evidence from publicly listed agro-food firms," Research in International Business and Finance, Elsevier, vol. 47(C), pages 237-250.
    4. Duong Phuong Thao Pham & Thi Cam Ha Huynh, 2020. "The Impact of Trade Credit Investment on Manufacturing Firms' Profitability: Evidence from Vietnam," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 68(4), pages 775-796.

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    More about this item

    Keywords

    multi-product firms; productivity; optimal product scope; Germany;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L6 - Industrial Organization - - Industry Studies: Manufacturing

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