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A Model of Firm Experimentation under Demand Uncertainty: an Application to Multi-Destination Exporters


  • Cristina Mitaritonna
  • Zhanar Akhmetova


Firm level data exhibits that new exporters tend to start small, a large fraction of these drops out by the second year of exporting, and the survivors expand rapidly. To take into account this stylized fact, we propose a theory of firm behavior that assumes demand uncertainty about the profitability of exporting in a new market. The firm can postpone paying the sunk cost of full-scale entry and test the market by observing individual sales to a few consumers. The firm optimally chooses the experimentation intensity, as well as the exit/entry policy. Applying Bayesian econometric techniques, we structurally estimate the model using French firm-level export data. A given geographical regions is viewed as a target market,and countries within the region as consumers. The estimate of the sunk cost is higher than in a model where the sunk cost cannot be postponed, like Melitz (2003). We also perform counterfactual simulations (exchange rate, sunk cost and experimentation cost).

Suggested Citation

  • Cristina Mitaritonna & Zhanar Akhmetova, 2013. "A Model of Firm Experimentation under Demand Uncertainty: an Application to Multi-Destination Exporters," Working Papers 2013-10, CEPII research center.
  • Handle: RePEc:cii:cepidt:2013-10

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    References listed on IDEAS

    1. Horstmann, Ignatius J & Markusen, James R, 1996. "Exploring New Markets: Direct Investment, Contractual Relations and the Multinational Enterprise," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(1), pages 1-19, February.
    2. Patrick Bolton & Christopher Harris, 1999. "Strategic Experimentation," Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
    3. Albornoz, Facundo & Calvo Pardo, Héctor F. & Corcos, Gregory & Ornelas, Emanuel, 2012. "Sequential exporting," Journal of International Economics, Elsevier, vol. 88(1), pages 17-31.
    4. Sanghamitra Das & Mark J. Roberts & James R. Tybout, 2007. "Market Entry Costs, Producer Heterogeneity, and Export Dynamics," Econometrica, Econometric Society, vol. 75(3), pages 837-873, May.
    5. Günter J. Hitsch, 2006. "An Empirical Model of Optimal Dynamic Product Launch and Exit Under Demand Uncertainty," Marketing Science, INFORMS, vol. 25(1), pages 25-50, 01-02.
    6. Costas Arkolakis, 2010. "Market Penetration Costs and the New Consumers Margin in International Trade," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1151-1199.
    7. Giuseppe Moscarini & Lones Smith, 1998. "Wald Revisited: The Optimal Level of Experimentation," Cowles Foundation Discussion Papers 1176, Cowles Foundation for Research in Economics, Yale University.
    8. Giuseppe Moscarini & Lones Smith, 2001. "The Optimal Level of Experimentation," Econometrica, Econometric Society, vol. 69(6), pages 1629-1644, November.
    9. Rauch, James E. & Watson, Joel, 2003. "Starting small in an unfamiliar environment," International Journal of Industrial Organization, Elsevier, vol. 21(7), pages 1021-1042, September.
    10. Ackerberg, Daniel & Caves, Kevin & Frazer, Garth, 2006. "Structural identification of production functions," MPRA Paper 38349, University Library of Munich, Germany.
    11. Jonathan Eaton, Marcela Eslava, Maurice Kugler,James Tybout, 1970. "Export Dynamics in Colombia: Firm-Level Evidence," Working Papers eg0036, Wilfrid Laurier University, Department of Economics, revised 1970.
    12. 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.
    13. Jonathan L. Willis & Kim J. Ruhl, 2009. "New Exporter Dynamics," 2009 Meeting Papers 111, Society for Economic Dynamics.
    14. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 317-341.
    15. Nguyen, Daniel X., 2012. "Demand uncertainty: Exporting delays and exporting failures," Journal of International Economics, Elsevier, vol. 86(2), pages 336-344.
    16. Freund, Caroline & Pierola, Martha Denisse, 2010. "Export entrepreneurs : evidence from Peru," Policy Research Working Paper Series 5407, The World Bank.
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    Cited by:

    1. Cebreros Zurita Carlos Alfonso, 2016. "The Rewards of Self-Discovery: Learning and Firm Exporter Dynamics," Working Papers 2016-08, Banco de México.
    2. Gloria Sheu & Andres Zahler & Eduardo Morales, 2016. "Extended Gravity," 2016 Meeting Papers 1565, Society for Economic Dynamics.
    3. Céline Carrère & Vanessa Strauss-Kahn, 2017. "Export survival and the dynamics of experience," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 153(2), pages 271-300, May.

    More about this item


    Demand Uncertainty; Optimal Experimentation; Heterogeneous Producers; New Exporter Dynamics; Structural Estimations; Bayesian Methods;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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