Kiel Working Papers, Kiel Institute for World Economics
No 1814:
Productivity and the Product Scope of Multi-product Firms: A Test of Feenstra-Ma
Horst Raff and Joachim Wagner
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
Keywords: Multi-product firms, productivity, optimal product scope, Germany; (follow links to similar papers)
JEL-Codes: L1,; L6; (follow links to similar papers)
7 pages, December 2012
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