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

Inflation Dynamics During the Financial Crisis

“…Recent work by Foster et al (2016) shows that even within commoditylike product industries in the manufacturing sector, the endogenous "demand accumulation process," whereby the producer actively influences its future demand by making pricing decisions that build customer base at the expense of current profits, is a key factor explaining the small size and slow growth of new plants in such industries. At the retail level, Hottman et al (2014) use scanner price and expenditure data on individual consumer products to show that demand differences- 9 The weights used to aggregate the good-level inflation rates in each month t are the product of the relative weight of a good in the establishment's production structure and the relative weight of the establishment as measured by its total shipments. It is also worth noting that the more pronounced drop in producer prices during the latter patter of the Great Recession recorded in the full PPI dataset (see panel (a) of Figure 1) is due to the fact the matched PPI-Compustat sample omits a number of goods that experienced out-sized price declines during this period, reflecting the drop in the energy prices.…”

“…First, the seminal contributions of Phelps and Winter (1970) and Bils (1989) show that pricing decisions in customer markets-markets in which a customer base is "sticky" and thus an important determinant of firms' assets and profitability-are a form of investment decisions because lower prices build the future customer base. 2 Second, recent work by Hottman et al (2014) and Foster et al (2016) documents that customer markets feature importantly in the major sectors of the U.S. economy. And lastly, as emphasized by Gottfries (1991) and Chevalier and Scharfstein (1996), in the presence of financial frictions, firms operating in customer markets that are experiencing a liquidity squeeze accompanying a fall in demand may find it optimal to maintain-or even increase-their prices and sacrifice future sales in order to boost current cashflows.…”

Inflation Dynamics during the Financial Crisis

“…First, the seminal contributions of Phelps and Winter (1970) and Bils (1989) show that pricing decisions in customer markets-markets in which a customer base is sticky and thus an important determinant of firms' assets and profitability-are a form of investment decisions because lower prices build the future customer base. 2 Second, Hottman, Redding, and Weinstein (2014) and Foster, Haltiwanger, and Syverson (2016) document that customer markets feature importantly in the major sectors of the US economy. And lastly, as emphasized by Gottfries (1991) and Chevalier and Scharfstein (1996), in the presence of financial frictions, firms operating in customer markets that are experiencing a liquidity squeeze accompanying a fall in demand may find it optimal to maintain-or even increase-their prices and sacrifice future sales in order to boost current cash flows.…”

“…Recent work by Foster, Haltiwanger, and Syverson (2016) shows that even within commodity-like product industries in the manufacturing sector, the endogenous demand accumulation process, whereby the producer actively influences its future demand by making pricing decisions that build customer base at the expense of current profits, is a key factor explaining the small size and slow growth of new plants in such industries. At the retail level, Hottman, Redding, and Weinstein (2014) use scanner price and expenditure data on individual consumer products to show that demand differences-reflecting variation in quality and taste among consumers-are the principal reason why some firms succeed in the marketplace while others fail. In addition, as documented by Roberts et al (2012); Eaton et al (2015);and Fitzgerald, Haller, and Yedid-Levi (2016), customer markets considerations also shape the pricing decision of exporting firms in both advanced and emerging market economies.…”

Overhead Labour and Skill-Biased Technological Change: The Role of Product Diversification

“…Firms need to access different segments of the market to increase their sales, and need to introduce a customized product to access certain market segments. According to Hottman et al (2014), "Variation in firm quality and product scope explains at least four fifths of the variation in firm sales." Therefore, the demand for fixed white-collar labour is still positively correlated with output at a more aggregated level.…”