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Product Choice and Product Switching

  • Andrew B. Bernard

    ()

    (Tuck School of Business)

  • Stephen J. Redding

    ()

    (London School of Economics & Political Science (LSE))

  • Peter K. Schott

    ()

    (School of Management)

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 Yale School of Management in its series Yale School of Management Working Papers with number ysm381.

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Date of creation: 11 Jun 2003
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Handle: RePEc:ysm:somwrk:ysm381
Contact details of provider: Web page: http://icf.som.yale.edu/

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  1. 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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  3. Dunne, Timothy & Roberts, Mark J & Samuelson, Larry, 1989. "The Growth and Failure of U.S. Manufacturing Plants," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 671-98, November.
  4. Nina Pavcnik, 2002. "Trade Liberalization, Exit, and Productivity Improvements: Evidence from Chilean Plants," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 245-276.
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  7. Francisco Alcalá & Antonio Ciccone, 2001. "Trade and productivity," Economics Working Papers 580, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 2002.
  8. George S Olley & Ariel Pakes, 1992. "The Dynamics Of Productivity In The Telecommunications Equipment Industry," Working Papers 92-2, Center for Economic Studies, U.S. Census Bureau.
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  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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  18. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
  19. 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.
  20. 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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  25. Kelvin J. Lancaster, 1966. "A New Approach to Consumer Theory," Journal of Political Economy, University of Chicago Press, vol. 74, pages 132.
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