Productivity and the Product Scope of Multi-product Firms: A Test of Feenstra-Ma
AbstractFeenstra 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.
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Bibliographic InfoPaper provided by University of Lüneburg, Institute of Economics in its series Working Paper Series in Economics with number 257.
Length: 12 pages
Date of creation: Dec 2012
Date of revision:
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Multi-product firms; productivity; optimal product scope; Germany;
Other versions of this item:
- Horst Raff & Joachim Wagner, 2013. "Productivity and the product scope of multi-product firms: a test of Feenstra-Ma," Economics Bulletin, AccessEcon, vol. 33(1), pages 415-419.
- Horst Raff & Joachim Wagner, 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.
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
- L6 - Industrial Organization - - Industry Studies: Manufacturing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-12-22 (All new papers)
- NEP-BEC-2012-12-22 (Business Economics)
- NEP-COM-2012-12-22 (Industrial Competition)
- NEP-EFF-2012-12-22 (Efficiency & Productivity)
- NEP-INT-2012-12-22 (International Trade)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lind, Jo Thori & Mehlum, Halvor, 2007.
"With or Without U? - The appropriate test for a U shaped relationship,"
4823, University Library of Munich, Germany.
- Jo Thori Lind & Halvor Mehlum, 2010. "With or Without U? The Appropriate Test for a U-Shaped Relationship," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 72(1), pages 109-118, 02.
- Lind , Jo Thori & Mehlum , Halvor, 2007. "With or Without U? The appropriate test for a U shaped relationship," Memorandum 21/2007, Oslo University, Department of Economics.
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