How Do Firms Grow? The Life Cycle of Products Matters

Abstract

We exploit detailed product- and firm-level data for the consumer goods industry and we document that the sales of individual products decline at a steady pace throughout most of their life cycles. This pattern is common across heterogenous types of products and is mostly due to declines in quantities sold rather than prices. To identify the margins affecting the life cycle of products, we propose a decomposition of product sales based on a parsimonious model of oligopolistic competition between heterogeneous multi-product firms. Our estimates indicate that the systematic decline in sales over time is mostly explained by declines in the appeal of products. The results are consistent with products quickly becoming obsolete as they face competition from newer products of competing firms (business stealing) and from newer products of the same firm (cannibalization). We show that firms must introduce new products to grow, otherwise their portfolio be- comes obsolete as their rivals introduce new products of their own. By introducing new products, however, firms accelerate the decline in sales of their own existing products.