What is Firm Heterogeneity in Trade Models? The Role of Quality, Scope, Markups, and Cost

54 Pages Posted: 25 Sep 2014

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: September 2014

Abstract

We estimate a structural model of heterogeneous multiproduct firms to examine the sources of firm heterogeneity emphasized in the recent trade and macro literatures. Using Nielsen barcode data on prices and sales, we estimate elasticities of substitution within and between firms, and use the estimated model to recover unobserved qualities, marginal costs and markups. We find that variation in firm quality and product scope explains at least four fifths of the variation in firm sales. Most firms are well approximated by the monopolistic competition benchmark of constant markups, but the largest firms that account for most of aggregate sales depart substantially from this benchmark. Although the output of multiproduct firms is differentiated, cannibalization is quantitatively important for the largest firms. This imperfect substitutability of products within firms, and the fact that larger firms supply more products than smaller firms, implies that standard productivity measures are not independent of demand system assumptions and probably dramatically understate the relative productivity of the largest firms.

Keywords: cannibalization effects, firm heterogeneity, multiproduct firms, productivity

JEL Classification: L11, L21, L25, L60

Suggested Citation

Hottman, Colin and Redding, Stephen J. and Weinstein, David E., What is Firm Heterogeneity in Trade Models? The Role of Quality, Scope, Markups, and Cost (September 2014). CEPR Discussion Paper No. DP10133, Available at SSRN: https://ssrn.com/abstract=2501616

Colin Hottman (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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 )

420 W. 118th Street
MC 3308
New York, NY 10027
United States
212-854-6880 (Phone)
212-854-8059 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
1
Abstract Views
525
PlumX Metrics