Multiproduct firms and market structure: An explorative application to the product life cycle

Abstract

The paper extends the standard Dixit-Stiglitz model of imperfect competition to allow for multiproduct firms, fully endogenising market structure by determining both the number of varieties per firm and the number of firms in the industry. The model is used to explore the proposition that shakeout in some industries may result in a shift from a fragmented market structure with many firms each offering a small range of products to a more concentrated equilibrium with fewer large firms each offering many products. D 2005 Elsevier B.V. All rights reserved. JEL classification: L11; L13

Multi-Product Firms and Flexible Manufacturing in the Global Economy

“…5 Single-product …rms face the same demand function (1) and are subject to constant marginal production costs c s . Hence, their output is given by…”

“…Their importance is documented in a recent study of U.S. …rms by Bernard, Redding and Schott (2006). 1 This shows that multi-product …rms are present in all industries; they typically coexist with singleproduct …rms, accounting for less than half (41%) of the total number of …rms but a much greater fraction (91%) of total output; and they are very active in varying their product mix: 89% of multi-product …rms do so on average every …ve years. Yet, despite this empirical importance, and despite the interest in trade as a source of increased product diversity, multi-product …rms have received relatively little attention in the theory of international trade.…”

“…Changes in diversity are linked exclusively to changes in the number of …rms. In contrast to the theory of international trade, multiproduct …rms have received more attention in the …eld of industrial organization (Brander and Eaton (1984), Ottaviano and Thisse (1999), Hallak (2000), Baldwin and Ottaviano (2001), Myatt (2003a, 2003b), Grossmann (2003), Baldwin and Gu (2005), Allanson and Montagna (2005)). These studies have emphasized that, because of supply and demand linkages, intra-…rm adjustments within multi-product …rms are signi…cantly di¤erent from adjustments via exit and entry.…”

“…This feature is called the "cannibalization e¤ect" and it is generally considered as a de…ning feature of multi-product …rms. The existence of a 1 This uses a longitudinal database derived from the U.S. Census of Manufactures with observations at …ve-yearly intervals between 1972 and 1997. Over 140,000 surviving …rms are present in each census year.…”

The Between Firm Effect with Multiproduct Firms

“…Firm heterogeneity can also change the conclusion regarding …rm scope. Using a nested CES preference utility function Allanson and Montagna (2005) show that in the long run, a …rm's scope is independent of the market size. In Mayer, Melitz and Ottaviano (2010), the …rms responded to more intense competition by focusing on a few core products and dropping those far from the core.…”