Multiproduct Firms Research Articles

How Do Firms Grow? The Life Cycle of Products Matters

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.

Entry and Exit, Multiproduct Firms, and Allocative Distortions

Most studies quantifying the gains from reversing allocative distortions are static in nature. We propose a model of firm dynamics featuring entry, exit, and multiproduct firms to understand the contribution of these dynamic factors in shaping the welfare and long-run productivity gains from removing distortions. We find that while the entry and exit of firms and their product-portfolio choices exert countervailing forces over long-run total factor productivity (TFP), they reinforce each other in shaping the welfare gains from reversing misallocation. Welfare gains, which account for transition dynamics, become more than twice as high as the long-run changes in TFP. (JEL D21, D24, D61, L11, O41)

A Schumpeterian theory of multi-quality firms

This paper introduces multi-quality firms within a Schumpeterian framework. Featuring non-homothetic preferences and income disparities in an otherwise standard quality-ladder model, it shows that the resulting differences in the willingness to pay for quality among consumers generate both positive investments in R&D by industry leaders and positive market shares for more than one quality, hence allowing for the emergence of multi-product firms within a vertical innovation framework. This positive investment in R&D by incumbents is obtained with complete equal treatment in the R&D field between the incumbent patent holder and the challengers: in this framework, the incentive for a leader to invest in R&D stems from a “surplus appropriation effect” specific to vertically-differentiated markets, i.e. the perspective of more efficient price discrimination when expanding the product portfolio. Such a framework makes it possible to analyse the impact of income distribution, as well as that of several possible R&D policies, both on long-term growth and on the allocation of R&D activities between challengers and incumbents.

Pass-Through by Multi-Product Firms

How does cost pass-through to prices depend on the set of products a multi-product firm owns? Using a structural demand model for the Swedish beer market, we simulate equilibrium cost pass-through for varying counterfactual ownership patterns. We find that a firm with a larger number of products in its portfolio and a higher degree of substitutability among these products adopts a lower pass-through of costs. While the direction of results is robust, our simulations show that the muting effect on pass-through is limited when comparing pass-through by stand-alone firms to pass-through under the actual, moderately concentrated market structure.

Carry-Along Trade

Large multi-product firms dominate international trade flows. This paper documents new facts about multi-product manufacturing exporters that are not easily reconciled with existing multi-product models. Using novel linked production and export data at the firm-product level, we find that the overwhelming majority of manufacturing firms export products that they do not produce. Three quarters of the exported products and thirty percent of export value from Belgian manufacturers are in goods that are not produced by the firm, so-called Carry-Along Trade (CAT). The number of CAT products is strongly increasing in firm productivity while the number of produced products that are exported is weakly increasing in firm productivity. We propose a general model of production and sourcing at multi-product firms. While the baseline model fails to reconcile the relationships between firm productivity and the numbers of exported products observed in the data, several demand and supply-side extensions to the model are more successful. Looking at export price data, we find support for a novel theoretical extension based on demand-scope complementarities.

Vertical Integration With Multiproduct Firms: When Eliminating Double Marginalization May Hurt Consumers

How do vertical mergers impact consumers? Though often presumed to eliminate double marginalization and generate efficiencies, theory predicts that vertical integration in multiproduct industries may cause price changes that hurt consumers even in the absence of market foreclosure. We measure the causal effects of vertical integration on prices by exploiting variation in vertical structure caused by vertical mergers in the carbonated-beverage industry. We find that vertical integration caused a decrease in the prices of products with eliminated double margins, but a price increase on average, raising the question of whether consumers necessarily benefit from vertical mergers.

Online Appendix for Multiproduct Firms, Consumer Search, and Demand Heterogeneity

This paper is the online appendix for Multiproduct Firms, Consumer Search, and Demand Heterogeneity. In this online appendix, we discuss a uniqueness and an existence of symmetric equilibria. First, we show that the system of the first-order-conditions has a unique solution. Then, we show that such first-order-conditions are sufficient for defining equilibrium prices for the specific distribution of match utilities. In the following context, we omit superscripts of density functions.

Designing Organizations in Volatile Markets

Multinational and multiproduct firms often experience uncertainty in the relative return of conducting activities in different markets due to, for example, exchange rate volatility or the changing prospects of different products. We study how a multi-divisional organization should optimally allocate decision-making authority to its managerial members when operating in such volatile markets. To be able to adapt its decisions to local conditions, the organization has to rely on self-interested division managers to collect and disseminate the relevant information. We show that if communication takes the form of verifiable disclosure, then centralized decision-making does not suffer from information asymmetry and it allows the headquarter of the organization to better cope with the inter-market uncertainty. However, also due to the inter-market uncertainty, centralization can perform poorly in motivating information acquisition, and particularly so when it is highly important to coordinate the activities of different divisions. As a result, decentralization can be optimal even with an arbitrarily strong coordination motive.

Multiproduct Firms, Consumer Search, and Demand Heterogeneity

This study constructs a consumer search model in which some consumers search for multiple products, whereas others search for a single product. A price difference arises because of a difference in the price elasticity for each group. We show that a positive demand shock to one of the products decreases the price of another product, whereas it increases its own price, and a negative correlation between the demands for each product strengthens these tendencies. Both prices decrease, however, following a positive demand shock when the demands for each product are positively correlated. We also show that multiproduct firms set a relatively high price for a more demanded product, as such a product's price tends to be more elastic with respect to search costs. A price difference between products increases as the demand gap between products increases or as economies of scale in search increase.

Exporting, access of foreign technology, and firms’ performance: Searching the link in Indian manufacturing

This study tests the impact of export and foreign technology on the indicators of firm’s performance for a sample of Indian manufacturing firms. To provide new insights into the debate over the linkage among export, technology, and performance, we employ several important performance indicators of firms, such as labor productivity, total factor productivity, product and process innovation, wage, size, and capacity utilization. For this study, we utilize a sample of firms from a recent Enterprise Surveys data of the World Bank on Indian manufacturing. The results of the analysis indicate that exporters are more productive and innovative. They are also large and utilize the capacity in a better way. The results further indicate that export leads to substantial performance gain for Indian firms. Similar results are also estimated for the effects of the use of foreign technology in the production process. Our findings also suggest that exporting products to the developed world have a significant effect on performance and further indicate that single product firms are more benefited from export and technology transfer than multi-product firms. It is also found that firms with more productivity decide to export their products; however, technology transfer is not a significant factor in making decisions about export or enhancing export-intensity. Overall, our analysis supports the argument that research and development (R&D) in the developed countries is an important source of technology for developing countries, and this takes place through export as well as direct technology transfer.

Economics literature on joint production of minerals: A survey

Processes which produce more than one output jointly are common across a host of industries and play a notable role in mineral supply. Many important commodities including oil and gas, copper and gold, or iron and rare earth elements, are produced together as joint products. Despite its prevalence, joint production has received only minor explicit treatment in the literature on mineral economics. This paper surveys and categorizes the mineral economics literature to highlight notable works and gaps that deserve the attention of future researchers. A key finding of the survey is that little unifying and empirically tested theory explains the behavior of multi-product firms or markets. However, several studies have found that unimportant joint products, sometimes called by-products, tend to be more available in an economic or physical sense than conventional wisdom may hold. Finally, literature on agriculture and fishing economics are provided as an example of how mineral economics might be better integrated into the economics discipline as a whole.

Incentives and Ratcheting in a Multiproduct Firm: A Field Experiment

We develop a model and derive behavioral predictions for a multiproduct sales force subject to goals set based on past performance. We test these predictions using a field experiment in which 53 salespersons from a Chilean beverage company face exogenous variations in monthly sales goals. Confirming our predictions, we found that (1) absent strategic considerations—no goal ratcheting—salespersons increase (decrease) sales in the product category for which the return to effort increases (decreases), (2) including strategic considerations behavior reverses: salespersons who expect high goal ratcheting decrease (increase) sales in the category for which the return to effort increases (decreases), (3) sales did not change for the average salespersons, reflecting heterogeneity in the expectations of goal ratcheting rather than unresponsiveness to incentives. Our study points at the importance of the dynamics of incentive design, in particular, the importance of understanding the dynamics of goal setting in firms. Data are available at https://doi.org/10.1287/mnsc.2017.2861 . This paper was accepted by Bruno Cassiman, strategy.

Complementarities and Coordination: Implications for Governance Mode and Performance of Multiproduct Firms

We explore the fit between a firm’s product portfolio strategy and its governance mode with respect to complementary activities that underlie its product offering. We view firm’s governance choice through the lens of orchestrating complementary activities that entail multiple interrelated and often simultaneously occurring transactions. Our key premise is that a broader product portfolio, while offering benefits through the bundle of complementary activities, raises the coordination costs for firms, making integration of complementary activities a preferred mode of governance. We find strong support for our arguments in the context of the U.S. healthcare industry. Hospitals with a narrow service portfolio are more likely to have contracts with physicians as external service providers, and hospitals with a broad service portfolio are more likely to employ their own physicians. Moreover, hospitals that deviate from this fit-based relationship suffer a significant penalty in terms of their financial performance as measured by return on assets (ROA) and return on sales (ROS). Our findings allow us to shed new light on the linkage between strategy and governance mode and enable us to illustrate that performance differences across multiproduct firms may be better understood by considering the fit between their strategy and their governance mode instead of simply focusing either on their strategy or on their governance mode per se.

Multiproduct oligopoly and trade between asymmetric countries

AbstractThis paper develops a general equilibrium model of oligopolistic multiproduct firms conducting trade between asymmetric countries, in which heterogeneous entrants choose their product ranges and outputs. We show that there are fewer exporters in the larger country, and each produces a wider range of products but exports fewer varieties. We also show that while trade liberalization increases the total number of consumed varieties, it decreases the total number of firms and may reduce the product range of each firm.

Multi-product firms in monopolistic competition: The role of scale-scope spillovers

We develop a monopolistic competition model where firms are multi-product, and the elasticity of substitution on the consumption side is variable. The cost function, otherwise very general, is such that expanding firm-level product range (scope) reduces marginal costs of production of existing varieties. This captures scale-scope spillovers, i.e. within-firm spillovers between the scale at which firms operate and their choices of scope. Firm-level product ranges and the mass of firms are endogenously determined. We show how an increase in market size affects the market outcome. A larger market leads to lower prices, larger outputs, and a wider industry-level product range. Firm-level product ranges expand (shrink) under sufficiently strong (weak) scale-scope spillovers. Last, under strong (weak) spillovers, the number of firms increases less (more) than proportionally to the market size.

Multi-product firms and product quality

We examine the global operations of multi-product firms. We present a flexible heterogeneous-firm trade model with either limited or strong scope for quality differentiation. Using customs data for China during 2002–2006, we empirically establish that firms allocate activity across products in line with a product hierarchy based on quality. Firms vary output quality across their products by using inputs of different quality levels. Their core competence is in varieties of superior quality that command higher prices but nevertheless generate higher sales. In markets where they offer fewer products, firms concentrate on their core varieties by dropping low-quality peripheral goods on the extensive margin and by shifting sales towards top-quality products on the intensive margin. The product quality ladder also governs firms' export dynamics, both in general and in response to the exogenous removal of MFA quotas on textiles and apparel. Our results inform the drivers and measurement of firm performance, the effects of trade reforms, and the design of development policies.

Implications of parent brand inertia for multiproduct pricing

This paper explores and quantifies the importance of parent brand state dependence to forward looking pricing outcomes in the area of umbrella branding and multi-product firms. We show through numerical simulations that loyalty (inertia) to the parent brand can decrease prices and reduce profits, as well as mitigate or even reverse the benefits of joint profit maximization relative to sub-brand profit maximization. These effects are mediated by brand asymmetries and the relative magnitude of sub-brand state dependence effects. Empirically, we focus on the Yogurt category, where we consider parent brands with several sub-brands. Using household level scanner data, we estimate the parameters that characterize consumer demand while flexibly accounting for consumer heterogeneity. We also estimate unobserved product costs based on a forward looking price setting game. Through counterfactual analysis, we study the overall effect of parent brand state dependence on prices and profits, as well as the empirical impact of joint profit maximization and changes in firms’ beliefs regarding consumer inertia. Our findings have implications for markets where demand is likely characterized by parent brand dynamics.

Complementary monopolies and multi-product firms

According to the classical result on complementary monopolies, a single-product firm unambiguously prefers purchasing complementary inputs from an integrated monopolistic supplier rather than from different non-integrated monopolistic suppliers. In this note, we account for the fact that firms often manufacture multiple products and show that the classical result on complementary monopolies can be reversed in such a case. Purchasing complementary inputs from non-integrated suppliers can be optimal for multi-product firms.

Complementary Monopolies and Multi-Product Firms

According to the classical result on complementary monopolies, a single-product firm unambiguously prefers purchasing complementary inputs from an integrated monopolistic supplier rather than from different non-integrated monopolistic suppliers. In this note, we account for the fact that firms often manufacture multiple products and show that the classical result on complementary monopolies can be reversed in such a case. Purchasing complementary inputs from non-integrated suppliers can be optimal for multi-product firms.

Corporate advantage in customer-centric diversification

Our theory explains how multi-product corporations that engage in customer-centric diversification can create and sustain corporate advantage. First, we invoke the concept of customer-centric assets to explain their role as the cornerstone of corporate advantage in customer-centric diversification. Second, our explanation of the corporate advantage in customer-centric diversification goes beyond the hypothetical ‘consumer synergies’ argument to also include the ‘market-power advantage’ argument. We explain the mechanisms employed by multi-product firms to share and/or leverage their customer-centric assets to create corporate advantage. Third, we explain how sustaining the corporate advantage so achieved requires the organizational-renewal activities to go beyond simply addressing the changing nature of the firm’s demand-side resource (i.e. customer-base) to manage revenue and/or profits.