Multiproduct Firms and the Business Cycle

Multiproduct firms account for a large fraction of economic activity and are actively engaged in changing their product mix. In this paper, I investigate changes in product scope, the number of products that a firm offers, over the business cycle and decompose the impact of such changes on aggregate output. I use the Nielsen Retail Scanner data of U.S. consumer goods purchases for 2007-2014. I find that firm product scope is an important margin of adjustment. The changes at the new margin are procyclical on average and heterogeneous across firms. Such product scope changes affect aggregate consumption and output by changing the total number of products available in the market and by affecting firms' markups. This decomposition is shown in a model featuring heterogeneous multiproduct firms, oligopolistic competition and free firm entry. Firm and aggregate outcomes vary in different states of economic activity. In a recession state, lower average product scope implies a lower number of product varieties, which disincentivizes consumption. Additionally, since the most productive firms have higher market shares, as the data suggests, they charge higher markups as oligopolistic competitors. The implied average markup goes up and further decreases consumption.