Product Mix and Firm Productivity Responses to Trade Competition

Citation:

Mayer, Thierry, Marc J. Melitz, and Gianmarco I.P. Ottaviano. Working Paper. “Product Mix and Firm Productivity Responses to Trade Competition”.
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Abstract:

We document how demand shocks in export markets lead French multi-product exporters to re-allocate the mix of products sold in those destinations. In response to positive demand shocks, 

those French firms skew their export sales towards their best performing products; and also ex- 
tend the range of products sold to that market. We develop a theoretical model of multi-product 
firms and derive the specific demand conditions needed to generate these product-mix reallo- 
cations. These demand conditions are associated with endogenous price elasticities that satisfy 
Marshall’s Second Law of Demand (the price elasticity of demand decreases with consumption). Under 
these demand conditions, our theoretical model highlights how the increased competition from demand 
shocks in export markets – and the induced product mix reallocations – induce productivity changes 
within the firm. We then empirically test for this connection between the demand shocks and the 
productivity of multi-product firms exporting to those destinations. We find that the effect of 
those demand shocks on productivity are substantial – and explain an
important share of aggregate productivity fluctuations for French manufacturing

Last updated on 01/14/2021