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Product Choice and Product Switching

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  • Bernard, Andrew
  • Redding, Stephen J
  • Schott, Peter

Abstract

This Paper develops a model of endogenous product selection by firms. The theory is motivated by new evidence we present on the importance of product switching by US manufacturers. Two-thirds of continuing firms change their product mix every five years, and product switches involve more than 40% of firm output and almost half of existing products. The theoretical model incorporates heterogeneous firms, heterogeneous products, and ongoing entry and exit. In equilibrium, firm productivity is correlated with product fixed costs, with the most productive firms choosing to make the products with the highest fixed costs. Changes in market structure result in systematic patterns of firm entry/exit and product switching.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3959.

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Date of creation: Jul 2003
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Handle: RePEc:cpr:ceprdp:3959

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Keywords: entry and exit; heterogenous firms; product differentiation; sunk costs;

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  1. Gollop, Frank M & Monahan, James L, 1991. "A Generalized Index of Diversification: Trends in U.S. Manufacturing," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 318-30, May.
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  17. repec:rus:hseeco:122439 is not listed on IDEAS
  18. Streitwieser, Mary L, 1992. "The Extent and Nature of Establishment-Level Diversification in Sixteen U.S. Manufacturing Industries," Journal of Law and Economics, University of Chicago Press, vol. 34(2), pages 503-34, October.
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  20. Steve J. Davis & John Haltiwanger, 1991. "Wage Dispersion Between and Within U.S. Manufacturing Plants, 1963-1986," NBER Working Papers 3722, National Bureau of Economic Research, Inc.
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