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Product Choice and Product Switching

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

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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File URL: http://www.nber.org/papers/w9789.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9789.

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Date of creation: Jun 2003
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Handle: RePEc:nbr:nberwo:9789
Note: IO
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  2. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
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  4. Mark Doms & Eric J. Bartelsman, 2000. "Understanding Productivity: Lessons from Longitudinal Microdata," Journal of Economic Literature, American Economic Association, vol. 38(3), pages 569-594, September.
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  8. Dunne, T. & Roberts, M.J. & Samuelson, L., 1988. "The Growth And Failure Of U.S. Manufacturing Plants," Papers 1-87-5, Pennsylvania State - Department of Economics.
  9. Kelvin J. Lancaster, 1966. "A New Approach to Consumer Theory," Journal of Political Economy, University of Chicago Press, vol. 74, pages 132.
  10. Andrew B Bernard & J. Bradford Jensen & Peter K Schott, 2002. "Survival of the Best Fit: Competition from Low Wage Countries and the (Uneven) Growth of U.S. Manufacturing Plants," Working Papers 02-22, Center for Economic Studies, U.S. Census Bureau.
  11. Francisco Alcalá & Antonio Ciccone, 2001. "Trade and productivity," Economics Working Papers 580, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 2002.
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  13. repec:rus:hseeco:122439 is not listed on IDEAS
  14. Bolton, Patrick & Farrell, Joseph, 1990. "Decentralization, Duplication, and Delay," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 803-26, August.
  15. Spence, Michael, 1976. "Product Differentiation and Welfare," American Economic Review, American Economic Association, vol. 66(2), pages 407-14, May.
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  17. 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.
  18. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
  19. Milgrom, Paul & Roberts, John, 1990. "The Economics of Modern Manufacturing: Technology, Strategy, and Organization," American Economic Review, American Economic Association, vol. 80(3), pages 511-28, June.
  20. Streitwieser, Mary L, 1992. "The Extent and Nature of Establishment-Level Diversification in Sixteen U.S. Manufacturing Industries," Journal of Law and Economics, University of Chicago Press, vol. 34(2), pages 503-34, October.
  21. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  22. Yakov Amihud & Baruch Lev, 1981. "Risk Reduction as a Managerial Motive for Conglomerate Mergers," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 605-617, Autumn.
  23. Helfat, C.E. & Raubitschek, R.S., 2000. "Product Sequencing: Co-Evolution of Knowledge, Capabilities and Products," Papers 00-1, U.S. Department of Justice - Antitrust Division.
  24. John Sutton, 2002. "Rich Trades, Scarce Capabilities - Industrial Development Revisited," The Economic and Social Review, Economic and Social Studies, vol. 33(1), pages 1-22.
  25. Steve J. Davis & John Haltiwanger, 1991. "Wage Dispersion Between and Within U.S. Manufacturing Plants, 1963-1986," NBER Working Papers 3722, National Bureau of Economic Research, Inc.
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