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How do you like what you like? The role of consumer preferences in manufacturing plants’ performance

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  • María Paula Álvarez Arboleda

    (Universidad de los Andes)

Abstract

This paper investigates the role of consumer preferences in shaping the performance of manufacturing firms in Colombia. I use data from Colombian manufacturing firms between 2000 and 2012 to decompose the contribution of consumer preferences into those attributable to preferences for certain goods (horizontal differentiation) and for particular providers of those goods (vertical differentiation). Employing a model that integrates consumer demand, following a nested CES structure, with firm production, I use key demand parameters to decompose the variance of firm sales into technical efficiency, input costs, and vertical and horizontal differentiation. I find that vertical differentiation plays a dominant role in explaining sales variance (85.9%), while horizontal differentiation and technical efficiency contribute to a lesser extent (26.2% and 29.2%, respectively). These findings underscore the importance of consumer preferences in determining firm outcomes, showing that demand-driven factors, frequently subsumed in productivity measures, outweigh traditional supply-side drivers that explain firms’ performance.

Suggested Citation

  • María Paula Álvarez Arboleda, 2025. "How do you like what you like? The role of consumer preferences in manufacturing plants’ performance," Documentos CEDE 2025-28, Universidad de los Andes, Facultad de Economía, CEDE.
    • Handle: RePEc:col:000089:021544
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    Keywords

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    JEL classification:

    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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