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Multi-Product Firms and Trade Liberalization

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Author Info
Andrew B. Bernard
Stephen Redding
Peter K. Schott

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Abstract

This paper develops a general equilibrium model of multi-product firms and analyzes their behavior during tradeliberalization. Firm productivity in a given product is modeled as a combination of firm-level "ability" and firmproduct-level "expertise", both of which are stochastic and unknown prior to the firm's payment of a sunk costof entry. Higher firm-level ability raises a firm's productivity across all products, which induces a positivecorrelation between a firm's intensive (output per product) and extensive (number of products) margins. Tradeliberalization fosters productivity growth within and across firms and in aggregate by inducing firms to shedmarginally productive products and forcing the lowest-productivity firms to exit. Though exporters produce asmaller range of products after liberalization, they increase the share of products sold abroad as well as exportsper product. All of these adjustments are shown to be relatively more pronounced in countries' comparativeadvantage industries.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0769.

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Date of creation: Dec 2006
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Handle: RePEc:cep:cepdps:dp0769

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Related research
Keywords: heterogeneous firms; endogenous product scope; love of variety; core competency;

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Find related papers by JEL classification:
F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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  6. Andrew B. Bernard & J. Bradford Jensen & Peter K. Schott, 2005. "Importers, Exporters, and Multinationals: A Portrait of Firms in the U.S. that Trade Goods," NBER Working Papers 11404, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  30. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November. [Downloadable!] (restricted)
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    Other versions:
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