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Productivity and the product scope of multi-product firms: A test of Feenstra-Ma

Author

Listed:
  • Raff, Horst
  • Wagner, Joachim

Abstract

Feenstra and Ma (2008) develop a monopolistic competition model where firms choose their optimal product scope by balancing the profits from a new variety against the costs of 'cannibalizing' sales of existing varieties. While more productive firms always have a higher market share, there is no monotonic relationship between firms' productivity level and their choices of product scope. In the model having a higher market share means that firms are hurt more by the 'cannibalization effect'. Therefore, the incentive to add more products weakens as productivity rises. This leads to Lemma 3 in Feenstra and Ma (2008): There is an inverted U-shaped relationship between firms' productivities and the range of varieties they choose to produce. This empirical note takes this Lemma to the data for firms from German manufacturing industries. Empirical evidence is in line with the results from the theoretical model.

Suggested Citation

  • Raff, Horst & Wagner, Joachim, 2012. "Productivity and the product scope of multi-product firms: A test of Feenstra-Ma," Kiel Working Papers 1814, Kiel Institute for the World Economy.
    • Handle: RePEc:zbw:ifwkwp:1814
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    2. Thierry Mayer & Marc J. Melitz & Gianmarco I. P. Ottaviano, 2021. "Market Size, Competition, and the Product Mix of Exporters," World Scientific Book Chapters, in: Firms and Workers in a Globalized World Larger Markets, Tougher Competition, chapter 5, pages 109-150, World Scientific Publishing Co. Pte. Ltd..
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    Cited by:

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    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L6 - Industrial Organization - - Industry Studies: Manufacturing

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