Multiproduct Firms Research Articles

Foreign competition and innovation

Empirical studies have found that enhanced foreign competition can encourage or discourage innovation. To address this relationship, I examine a market structure in which a small number of large multi-product oligopolists compete with a large number of small single-product firms in the same industry. The single-product firms are short-lived while the multi-product firms live forever, and the large firms invest in innovation in order to enlarge their product spans. All firms export. I show that an increase in the competitiveness of foreign firms can increase or reduce innovation efforts of a large multi-product firm. Moreover, changes in the incentives to innovate can be different for more-productive and less-productive oligopolists. As a result, aggregate sectoral innovation may rise or decline, depending on the productivity distribution of the oligopolists. I also show that changes in short-term operating profits may not be aligned with changes in the incentives to innovate.

Standard Errors for Calibrated Parameters

Abstract Calibration, the practice of choosing the parameters of a structural model to match certain empirical moments, can be viewed as minimum distance estimation. Existing standard error formulas for such estimators require a consistent estimate of the correlation structure of the empirical moments, which is often unavailable in practice. Instead, the variances of the individual empirical moments are usually readily estimable. Using only these variances, we derive conservative standard errors and confidence intervals for the structural parameters that are valid even under the worst-case correlation structure. In the over-identified case, we show that the moment weighting scheme that minimizes the worst-case estimator variance amounts to a moment selection problem with a simple solution. Finally, we develop tests of over-identifying or parameter restrictions. We apply our methods empirically to a model of menu cost pricing for multi-product firms and to a heterogeneous agent New Keynesian model.

Domestic market integration and multi-product firms’ export behaviours: evidence from China

ABSTRACT This study investigates the effects of domestic market integration (DMI) on corporate export behaviour. Utilizing a regional DMI index and data from Chinese A-share listed multi-product firms between 2006 and 2015, we find that DMI expands export scale and reinforces firms’ export behaviours. Specifically, quality-based competence firms upgrade the quality of their core products, whereas cost-based competence firms reduce the prices of their core products. These findings have significant implications for emerging countries implementing upgraded international trade and prompting domestic market integration.

Domestic Transportation Infrastructure and Export Performance of Multiproduct Firms: The Role of Domestic Intermediate Inputs

Domestic Transportation Infrastructure and Export Performance of Multiproduct Firms: The Role of Domestic Intermediate Inputs

Strategic inattention of multi-product firms with free entry

This paper considers the strategic (in)attention of multi-product firms with endogenous product range choice and introduces free entry prior to firms' strategic choices on attention or inattention. We find that within-firm cannibalization of multi-product firms plays a key role in determining firms' strategic behavior. Furthermore, with free entry, we identify a single threshold that determines whether all the entrants are attentive or inattentive, and hence the market structure is unique almost everywhere.

Exchange rate pass-through to export prices in China: does product quality matter?

ABSTRACT Using a unique data set of Chinese firm-product-destination level export on the period 2000–2013, this paper investigates the effect of real exchange rate changes on multi-product firms’ price setting decisions on export product with heterogeneous levels of quality. We find less exchange rate pass-through (ERPT) for higher-quality products. Meanwhile, the ERPT is higher when the Renminbi (RMB) appreciates than when it depreciates, and product quality has a greater effect on the ERPT during RMB depreciation. Furthermore, higher distribution costs lead to more pricing-to-market (PTM) and less pass-through. This heterogeneity in ERPT is also robust in different samples and econometric specifications. Combined with the existing studies on the effects of firm heterogeneity on the ERPT, our study helps piece together a more complete picture of the heterogeneity across firms in their reaction to export prices when the exchange rate changes.

Import competition and energy efficiency: Firms' responses to the WTO accession in China

This paper investigates the impact of import competition on energy efficiency among firms in China. Using a difference-in-differences approach that exploits industry- and firm-level tariff reductions following China's accession to the WTO, we examine the effects of reduced output tariffs on coal intensity, measured as coal use per output, of Chinese manufacturing firms. Our findings indicate that higher levels of import competition lead to significant reductions in coal intensity, without negatively affecting firm production levels. We also find evidence that these effects are primarily driven by multi-product firms adjusting their product mix to prioritize energy-saving options.

Organisational knowledge stocks and exploitative development of new radical products

PurposeDespite the important role that exploitation plays in innovation and new product development (NPD), research on the relative impact of internal organisational stocks of existing knowledge on subsequent exploitation is largely absent. In particular, there is lack of clarity within the extant literature regarding the associations between organisational exploitation and, respectively, the distal-proximal technological experience and radical-incremental innovative experience generated by multiproduct firms. Thus, this study seeks to further enhance researchers’ theoretical understanding on the relationship between organisational exploitation and internal knowledge stocks categorised along two dimensions of organisational experience accumulated by multiproduct firms that have not previously been considered jointly.Design/methodology/approachThis paper pursues a focussed literature review approach and applies the underlying theory of exploitation to develop a theory explaining the possible relationships between organisational exploitation and internal knowledge stocks.FindingsBased on the theory of exploitation, this paper proposes a new direction in studying the various internal knowledge stocks and their respective impact on subsequent organisational exploitation.Practical implicationsThe proposed research direction suggests an emerging framework of possible relationships between exploitative new radical products development in firms, and respectively, proximal and distal technological experience, and radical and incremental innovative experience, accumulated in multiproduct firms. This novel framework can guide further research on this topic.Originality/valueTo fill a research gap regarding the possible relationships between subsequent exploitative endeavours and two dimensions of organisational experience that have been traditionally associated with the exploration-exploitation construct, this paper proposes and develops a novel typology of knowledge stocks categorised along two dimensions of organisational experience accumulated by multiproduct firms that have not previously been considered jointly in the literature.

Multi-product firm price and variety response to firm-specific cost shocks

A large literature studies how prices respond to changes in market conditions. More recent work examines firm adjustments along the product quality and variety channels. We present a theoretical model of heterogeneous, multi-product firms to characterize the response of firms to idiosyncratic cost shocks along the price and variety channels. The model delivers rich implications and interesting trade-offs between the two channels. Large firms respond to a cost increase by raising both prices and scope. Relative to smaller firms, they respond more through scope than prices. Availability of the variety channel eases pressures to absorb cost changes and increases pass-through.

Environmental Policy in Vertical Markets with Downstream Pollution: Taxes Versus Standards

Abstract This paper examines the performance of two environmental regulation policies – emission taxes and absolute standards – in a vertical market where an upstream foreign monopolist sells a specific input to two downstream multiproduct firms that generate pollution in the domestic country. Specifically, we use a three-stage game to analyze and compare the two policies for regulating downstream pollution. In the first stage, the domestic government determines an optimal tariff and sets one of the two instruments (taxes or standards) by maximizing social welfare, in stage two, the upstream foreign monopoly sets its input price, and finally, the downstream domestic firms independently make their output and abatement decisions for profit maximization. We find that total emissions are lower under the absolute standard. Nevertheless, the tax dominates the standard in terms of domestic welfare, consumer surplus, and downstream multiproduct firms’ profits. Thus, the tax equilibrium leads to a win-win-win situation compared to the standard equilibrium. These results show the non-equivalence of emission taxes and absolute standards in regulating downstream pollution. The analyses suggest that a pollution tax is an economically and politically feasible policy.

Multiproduct firm’s reputation and leniency program in multimarket collusion

The corporate leniency program is believed to be useful for antitrust authorities. Our study challenges this belief in a setting where a large multiproduct firm meets single-product firms in independent and isolated markets. We explore an adversary effect of the corporate leniency program in multimarket collusion in a reputation model. A multiproduct firm forming cartels in multiple markets can build its reputation as a tough firm that punishes any deviation by applying for leniency. We show that the multiproduct firm can manipulate the leniency program to stabilize cartels in markets without material linkages (such as demand linkages). This effect does not exist if only one market exists or the leniency-application outcome is not publicly observable. Our findings theoretically explain why the numerous leniency applications by multiproduct firms should concern antitrust agencies and imply several directions for revising the leniency policy.

Multi-product firms and misallocation

This paper studies how distortions alter firms’ product decisions. Using two firm-level datasets in China, we find (i) that multi-product (MP) firms are fewer and smaller in China than in the United States and (ii) that the MP probability of a firm is negatively associated with the level of distortion. We build discrete product choices into a heterogeneous firm model à la Melitz (2003) with entry and exit. Firms are subject to a size-dependent distortion that increases in firm-level productivities and product-level tastes. Calibrated to firm-level data moments in the United States and China, the model generates a welfare loss of 30% compared to the distortion-free economy. 24% of the overall loss is from the distorted product margin, while most of the rest is from the static misallocation as in Hsieh and Klenow (2009).

Price Discrimination in Selection Markets

Abstract Should insurance prices vary with age? I consider competitive markets for lemons where a signal (e.g., age) partitions consumers (e.g., young and old). I study the continuum of policies from zero price-discrimination (zero- PD, equal prices) to full-PD (no restrictions). Restricting PD can increases welfare if high-cost markets exhibit greater adverse selection, or when the high-cost market “unravels.” I characterize optimal PD, and show how it is affected by changes in cost. In a calibration, optimal PD increases welfare by about $30/person-year. I extend the model to arbitrary signal structures, behavioral consumers, a monopolized industry, and multi-product firms.

Scale, scope, and the international expansion strategies of multiproduct firms

AbstractA growing literature seeks to understand how the characteristics of firms shape the manner in which they serve foreign markets. We consider an environment in which multiproduct firms can sell their products in multiple countries from multiple locations. We show that there are strong empirical regularities in the expansion strategies of U.S. multinational firms and that simple extensions of standard models do not explain these regularities. We augment these models by introducing a framework in which organizational capital is a scarce input within the firm that has to be allocated to particular products and production locations and show that the standard model, so amended, is consistent with the data. We then use the model to analyze the productivity effect of changes in international frictions both within and across firms.

Trade, location, and multi-product firms

In this paper we study how trade liberalization affects the location and the product scope of firms. We find that the largest and most productive multi-product firms concentrate to the larger market as a result of trade liberalization. In the presence of relocation costs, we also find that these firms will expand their product scope in the larger market while firms in the smaller market will contract their product scope or expand it to a smaller degree. The adjustment of firms’ product scope can therefore be a substitute for firm relocation, and the cost of introducing new varieties becomes an important parameter, that influences the degree of agglomeration.

Rebates Offered by a Multiproduct Firm

Whereas the literature on rebates has focused on single-product firms, this paper analyses the role of rebates offered by a multiproduct firm

Revealed preference tests for price competition in multi-product differentiated markets

Assumptions of competitive structure are often crucial for marginal cost estimation and counterfactual predictions. This paper introduces tests for price competition among multi-product firms. The tests are based on the firm’s revealed preference (revealed profit function). In contrast to other approaches based on estimated demand functions such as conduct parameter estimation, the proposed tests do not require any instrumental variables, even though the models can accommodate structural error terms. In this paper, I employ a demand structure introduced by Nocke and Schutz (Econometrica 86(2):523–557, 2018. https://doi.org/10.3982/ECTA14720), the discrete/continuous choice model, which nests the multinomial logit demand and CES demand functions. Any price and quantity data can be rationalized by price competition under a discrete/continuous choice model and increasing marginal costs. Adding more assumptions to the demand functions, such as logit, CES, or the co-evolving and log-concave property produces some falsifiable restrictions.

The great expansion: The exceptional spread of bank branches in interwar France

Using newly collected data at the city level between 1910 and 1938, this article shows that, after World War I, France experienced an unprecedented expansion in bank branches mostly due to the creation of temporary branches in rural areas. The banking crisis in early 1930s paused this expansion. Nevertheless, the number of bank branches per capita remained four times higher than before the war. Also, the expansion of bank branches was not associated with an increase in the ratio of bank assets to national income. These findings re-evaluate the Great Reversal hypothesis in banking and reveal the disconnection between geographical expansion of banks and standard measures of financial development. Both trends can be reconciled if one considers that banks are multi-product firms – not just lenders – and that competition for new customers is not always associated with greater credit activity.

Competitive multiproduct contracting under multinomial logit demand

Despite the prevalence of multiproduct firms in many industries, the supply chain contracting literature has predominantly focused on problems where an upstream player offers only one product. This paper studies multiproduct contract design for competing manufacturers each with several products to sell via a common retailer. We consider two contracting schemes under multinomial logit demand (MNL): individual contracting, in which the manufacturers set a wholesale price for each of their products separately; and aggregate contracting, in which the manufacturers set the price as a function of the order quantities for their own products. We find that under individual contracting it is optimal for each manufacturer to offer the full range of his products to the retailer and set an equal wholesale margin for these products. This suggests that the classic result of an equal‐margin policy for the retailer also holds true for the manufacturers. Further, there is an equilibrium characterized by a system of nonlinear equations that can be solved using the standard bisection search method. Under aggregate contracting, a simple cost‐plus contract is optimal for the manufacturers. In equilibrium, each manufacturer charges a markup equal to his marginal contribution to the supply chain, and the supply chain profit is maximized. Comparing these two contracting schemes, we find among other results that the retailer prefers aggregate contracting when there is a large number of products from each manufacturer or when consumer heterogeneity is low, while the opposite is true for the manufacturers. In addition, both the retailer and the manufacturers prefer aggregate contracting when there are few manufacturers in the supply chain. It is also found that as the number of manufacturers or the number of products from each manufacturer increases, the supply chain efficiency loss induced by individual contracting is reduced. Finally, we extend our model to a hybrid setting in which one manufacturer adopts aggregate contracting and the other adopts individual contracting, and demonstrate to the manufacturers the value of aggregate contracting. These results provide useful guidance on optimal contract design for multiproduct firms.

Dynamics of Large Multinationals

Abstract Multinational enterprises are very large multi-product firms. To capture salient features of the data, we develop a model of large multinational enterprises, each one producing a continuum of products. These outsized firms compete as oligopolists in domestic and foreign markets, facing competitive pressure from monopolistically competitive single-product firms. The multinational enterprises engage in foreign direct investment (FDI) in order to expand the product scope of their foreign affiliates, and they invest in research and development (R&D) in order to invent new products. We study the dynamic evolution of these enterprises and characterize transition dynamics and steady states. We also characterize the evolution of prices, markups, market shares, and exports relative to subsidiary sales. Furthermore, we study comparative dynamics that result from changes in trade costs, R&D costs, FDI costs, and productivity. Finally, we illustrate the use of our model for an analysis of mergers.