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Optimal Choice of Product Scope for Multiproduct Firms under Monopolistic Competition

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  • Robert Feenstra
  • Hong Ma

Abstract

In this paper we develop a monopolistic competition model where firms exercise their market power across multiple products. Even with CES preferences, markups are endogenous. Firms choose their optimal product scope by balancing the net profits from a new variety against the costs of "cannibalizing" their own sales. With identical costs across firms, opening trade leads to fewer firms surviving in each country but more varieties produced by each of those firms. With heterogeneous costs, the number of firms surviving in equilibrium is quite insensitive to the market size. When trade is opened, more firms initially enter, but the larger market size reduces the cannibalization effect and expands the optimal scope of products. As a result, the less efficient firms exit, and the larger market is accommodated by more efficient firms that produce more varieties per firm on average.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13703.

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Date of creation: Dec 2007
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Publication status: published as “Optimal Choice of Product Scope for Multiproduct Firms under Monopolistic Competition,” E. Helpman, D. Marin and T. Verdier, eds., The Organization of Firms in a Global Economy , Harvard University Press, 2009, 173-199, with Hong Ma.
Handle: RePEc:nbr:nberwo:13703

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Cited by:
  1. Thierry Mayer & Marc J. Melitz & Gianmarco I. P. Ottaviano, 2014. "Market Size, Competition, and the Product Mix of Exporters," American Economic Review, American Economic Association, vol. 104(2), pages 495-536, February.
  2. Eckel, Carsten & Iacovone, Leonardo & Javorcik, Beata & Neary, J Peter, 2011. "Multi-Product Firms at Home and Away: Cost- versus Quality-based Competence," CEPR Discussion Papers 8186, C.E.P.R. Discussion Papers.
  3. Tomasz Serwach, 2012. "Why Learning by Exporting May Not Be As Common As You Think and What It Means for Policy," International Journal of Management, Knowledge and Learning, International School for Social and Business Studies, Celje, Slovenia, vol. 1(2), pages 157-172.
  4. Ramon Caminal & Lluís M. Granero, 2012. "Multi‐product Firms and Product Variety," Economica, London School of Economics and Political Science, vol. 79(314), pages 303-328, 04.
  5. Nakhoda, Aadil, 2012. "The effect of foreign competition on product switching activities: A firm level analysis," MPRA Paper 39167, University Library of Munich, Germany.
  6. Oliver Lorz & Matthias Wrede, 2009. "Trade and Variety in a Model of Endogenous Product Differentiation," MAGKS Papers on Economics 200902, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  7. Horst Raff & Nicolas Schmitt, 2011. "Manufacturers and Retailers in the Global Economy," CESifo Working Paper Series 3508, CESifo Group Munich.
  8. Nakhoda, Aadil, 2013. "The impact of the exports of BRIC countries plus Turkey on the exports of Pakistan," MPRA Paper 52477, University Library of Munich, Germany.

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