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Product choice and product switching

  • Andrew B. Bernard
  • Stephen Redding
  • Peter K. Schott

This paper develops a model of endogenous product selection by firms. The theory is motivated by new evidence we present on the importance of product switching by U.S. manufacturers. Two-thirds of continuing firms change their product mix every five years, and product switches involve more than 40% of firm output and almost half of existing products. The theoretical model incorporates heterogeneous firms, heterogeneous products, and ongoing entry and exit. In equilibrium, firm productivity is correlated with product fixed costs, with the most productive firms choosing to make the products with the highest fixed costs. Changes in market structure result in systematic patterns of firm entry/exit and product switching.

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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 3672.

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Length: 44 pages
Date of creation: Nov 2003
Date of revision:
Handle: RePEc:ehl:lserod:3672
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  19. Gollop, Frank M & Monahan, James L, 1991. "A Generalized Index of Diversification: Trends in U.S. Manufacturing," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 318-30, May.
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