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Optimal Choice of Product Scope for Multiproduct Firms under Monopolistic Competition

Author

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  • Robert Feenstra
  • Hong Ma

Abstract

In this paper we develop a monopolistic competition model where firms exercise their market power across multiple products. Even with CES preferences, markups are endogenous. Firms choose their optimal product scope by balancing the net profits from a new variety against the costs of "cannibalizing" their own sales. With identical costs across firms, opening trade leads to fewer firms surviving in each country but more varieties produced by each of those firms. With heterogeneous costs, the number of firms surviving in equilibrium is quite insensitive to the market size. When trade is opened, more firms initially enter, but the larger market size reduces the cannibalization effect and expands the optimal scope of products. As a result, the less efficient firms exit, and the larger market is accommodated by more efficient firms that produce more varieties per firm on average.

Suggested Citation

  • 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.
  • Handle: RePEc:nbr:nberwo:13703
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    References listed on IDEAS

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    1. Christian Broda & David E. Weinstein, 2006. "Globalization and the Gains From Variety," The Quarterly Journal of Economics, Oxford University Press, vol. 121(2), pages 541-585.
    2. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2004. "Dissecting Trade: Firms, Industries, and Export Destinations," American Economic Review, American Economic Association, vol. 94(2), pages 150-154, May.
    3. Christian Broda & David E. Weinstein, 2010. "Product Creation and Destruction: Evidence and Price Implications," American Economic Review, American Economic Association, vol. 100(3), pages 691-723, June.
    4. Carsten Eckel & J. Peter Neary, 2010. "Multi-Product Firms and Flexible Manufacturing in the Global Economy," Review of Economic Studies, Oxford University Press, vol. 77(1), pages 188-217.
    5. Andrew B. Bernard & Stephen J. Redding & Peter K. Schott, 2007. "Comparative Advantage and Heterogeneous Firms," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 31-66.
    6. Brambilla, Irene, 2009. "Multinationals, technology, and the introduction of varieties of goods," Journal of International Economics, Elsevier, vol. 79(1), pages 89-101, September.
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    Citations

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    Cited by:

    1. repec:eee:reecon:v:71:y:2017:i:4:p:675-689 is not listed on IDEAS
    2. Eckel, Carsten & Iacovone, Leonardo & Javorcik, Beata & Neary, J. Peter, 2015. "Multi-product firms at home and away: Cost- versus quality-based competence," Journal of International Economics, Elsevier, vol. 95(2), pages 216-232.
    3. Thierry Mayer & Marc J. Melitz & Gianmarco I. P. Ottaviano, 2014. "Market Size, Competition, and the Product Mix of Exporters," American Economic Review, American Economic Association, vol. 104(2), pages 495-536, February.
    4. Nakhoda, Aadil, 2013. "The impact of the exports of BRIC countries plus Turkey on the exports of Pakistan," MPRA Paper 52477, University Library of Munich, Germany.
    5. Ramon Caminal & Lluís M. Granero, 2012. "Multi‐product Firms and Product Variety," Economica, London School of Economics and Political Science, vol. 79(314), pages 303-328, April.
    6. Thierry Mayer & Marc J. Melitz & Gianmarco I. P. Ottaviano, 2014. "Market Size, Competition, and the Product Mix of Exporters," American Economic Review, American Economic Association, vol. 104(2), pages 495-536, February.
    7. Becker, Dennis, 2014. "Informality among multi-product firms," Working Papers 250009, Cornell University, Department of Applied Economics and Management.
    8. Horst Raff & Nicolas Schmitt, 2016. "Manufacturers and retailers in the global economy," Canadian Journal of Economics, Canadian Economics Association, vol. 49(2), pages 685-706, May.
    9. W. Steingress, 2015. "Entry barriers to international trade: product versus firm fixed costs," Working papers 544, Banque de France.
    10. repec:era:wpaper:dp-2015-55 is not listed on IDEAS
    11. Nakhoda, Aadil, 2012. "The effect of foreign competition on product switching activities: A firm level analysis," MPRA Paper 39167, University Library of Munich, Germany.
    12. Thierry Mayer & Marc J. Melitz & Gianmarco I. P. Ottaviano, 2014. "Market Size, Competition, and the Product Mix of Exporters," American Economic Review, American Economic Association, vol. 104(2), pages 495-536, February.
    13. Arnarson, Björn Thor, 2015. "Bridging Trade Barriers: Evaluating Models of Multi-Product Exporters," Working Papers 2015:6, Lund University, Department of Economics, revised 14 Oct 2016.
    14. Minniti, Antonio & Turino, Francesco, 2013. "Multi-product firms and business cycle dynamics," European Economic Review, Elsevier, vol. 57(C), pages 75-97.
    15. Lorz Oliver & Wrede Matthias, 2009. "Trade and Variety in a Model of Endogenous Product Differentiation," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(1), pages 1-14, November.
    16. Tomasz Serwach, 2012. "Why Learning by Exporting May Not Be As Common As You Think and What It Means for Policy," International Journal of Management, Knowledge and Learning, International School for Social and Business Studies, Celje, Slovenia, vol. 1(2), pages 157-172.
    17. Dalvai, Wilfried, 2016. "Agglomeration and the product mix," Thuenen-Series of Applied Economic Theory 145, University of Rostock, Institute of Economics.
    18. Joshua Wilde & Ishani Tewari, 2014. "Multiproduct Firms, Product Scope and Productivity: Evidence from India’s Product Reservation Policy," Working Papers 0214, University of South Florida, Department of Economics.
    19. repec:eee:reveco:v:54:y:2018:i:c:p:262-273 is not listed on IDEAS

    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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