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Market size, competition and the product mix of exporters

  • Thierry Mayer

    (Sciences-Po
    CEPII
    CEPR)

  • Marc J. Melitz

    (Harvard University
    NBER
    CEPR)

  • Gianmarco I.P. Ottaviano

    (Bocconi University
    Fondazione Eni Enrico Mattei (FEEM)
    CEPR)

Recent empirical evidence has highlighted how the export patterns of multi-product firms dominate world trade flows, and how these multi-product firms respond to different economic conditions across export markets by varying the number of products they export. In this paper, we further analyze the effects of those export market conditions on the relative export sales of those goods: we refer to this as the firm's product mix choice. We build a theoretical model of multi-product firms that highlights how market size and geography (the market sizes of and bilateral economic distances to trading partners) affects both a firm's exported product range and its exported product mix across market destinations. We show how tougher competition in an export market - associated with a downward shift in the distribution of markups across all products sold in the market - induces a firm to skew its export sales towards its best performing products. We find very strong confirmation of this competitive effect for French exporters across export market destinations. Our theoretical model shows how this effect of export market competition on a firm's product mix then translates into differences in measured firm productivity. Thus, a firm operating a given technology will produce relatively more output per worker when it exports to markets with tougher competition. This productivity gain is further compounded by the effect of competition on the mix of exported products.

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Paper provided by National Bank of Belgium in its series Working Paper Research with number 202.

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Length: 47 pages
Date of creation: Oct 2010
Date of revision:
Handle: RePEc:nbb:reswpp:201010-202
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  1. James Harrigan & Haiyan Deng, 2010. "China's Local Comparative Advantage," NBER Chapters, in: China's Growing Role in World Trade, pages 109-133 National Bureau of Economic Research, Inc.
  2. Gregory Corcos & Massimo Del Gatto & Giordano Mion & Gianmarco I. P. Ottaviano, 2011. "Productivity and firm selection: quantifying the ‘new’ gains from trade," LSE Research Online Documents on Economics 42684, London School of Economics and Political Science, LSE Library.
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  5. Marc J. Melitz & Gianmarco I. P. Ottaviano, 2008. "Market Size, Trade, and Productivity," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 295-316.
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  7. Matthieu Crozet & Pamina Koenig, 2010. "Structural gravity equations with intensive and extensive margins," Canadian Journal of Economics, Canadian Economics Association, vol. 43(1), pages 41-62, February.
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  10. Paul Allanson & Catia Montagna, 1999. "Multiproduct Firms and Market Structure: An Explorative Application to the Product Life Cycle," Dundee Discussion Papers in Economics 101, Economic Studies, University of Dundee.
  11. Costas Arkolakis & Marc-Andreas Muendler, 2010. "The Extensive Margin of Exporting Products: A Firm-level Analysis," CESifo Working Paper Series 3309, CESifo Group Munich.
  12. John Baldwin & Wulong Gu, 2009. "The Impact of Trade on Plant Scale, Production-Run Length and Diversification," NBER Chapters, in: Producer Dynamics: New Evidence from Micro Data, pages 557-592 National Bureau of Economic Research, Inc.
  13. Keith Head & Thierry Mayer, 2011. "Gravity, market potential and economic development," Journal of Economic Geography, Oxford University Press, vol. 11(2), pages 281-294, March.
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  18. repec:spo:wpecon:info:hdl:2441/10147 is not listed on IDEAS
  19. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
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  22. Thierry Mayer & Gianmarco Ottaviano, 2007. "The happy few: the internationalisation of European firms New facts based on firm-level evidence," Sciences Po publications info:hdl:2441/10147, Sciences Po.
  23. Iacovone, Leonardo & Javorcik, Beata S., 2008. "Multi-product exporters : diversification and micro-level dynamics," Policy Research Working Paper Series 4723, The World Bank.
  24. Robert Feenstra & Hong Ma, 2007. "Optimal Choice of Product Scope for Multiproduct Firms under Monopolistic Competition," NBER Working Papers 13703, National Bureau of Economic Research, Inc.
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