Quantifying the Sources of Firm Heterogeneity

63 Pages Posted: 3 Sep 2014 Last revised: 2 Dec 2015

See all articles by Colin Hottman

Colin Hottman

Board of Governors of the Federal Reserve System

Stephen J. Redding

Princeton University

David E. Weinstein

Columbia University - Graduate School of Arts and Sciences - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: August 2014

Abstract

We develop and structurally estimate a model of heterogeneous multiproduct firms that can be used to decompose the firm-size distribution into the contributions of costs, “appeal” (quality or taste), markups, and product scope. Using Nielsen bar-code data on prices and sales, we find that variation in firm appeal and product scope explains at least four fifths of the variation in firm sales. We show that the imperfect substitutability of products within firms, and the fact that larger firms supply more products than smaller firms, implies that standard productivity measures are highly dependent on implicit demand system assumptions and probably dramatically understate the relative productivity of the largest firms. Although most firms are well approximated by the monopolistic competition benchmark of constant markups, we find that the largest firms that account for most of aggregate sales depart substantially from this benchmark, and exhibit both variable markups and substantial cannibalization effects.

Suggested Citation

Hottman, Colin and Redding, Stephen J. and Weinstein, David E., Quantifying the Sources of Firm Heterogeneity (August 2014). NBER Working Paper No. w20436, Available at SSRN: https://ssrn.com/abstract=2490844

Colin Hottman (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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HOME PAGE: http://www.federalreserve.gov/econresdata/colin-j-hottman.htm

Stephen J. Redding

Princeton University ( email )

Princeton, NJ 08544-1021
United States

HOME PAGE: http://www.princeton.edu/~reddings/

David E. Weinstein

Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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