Product Mix and Firm Productivity Responses to Trade Competition

59 Pages Posted: 25 Jul 2016 Last revised: 19 Apr 2025

See all articles by Thierry Mayer

Thierry Mayer

Institut d'Etudes Politiques de Paris (Sciences Po)

Marc J. Melitz

Centre for Economic Policy Research (CEPR); Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Gianmarco I.P. Ottaviano

Bocconi University - Department of Economics and Paolo Baffi Centre on Central Banking and Financial Regulation

Multiple version iconThere are 3 versions of this paper

Date Written: July 2016

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 extend the range of products sold to that market. We develop a theoretical model of multiproduct firms and derive the specific demand conditions needed to generate these product-mix reallocations. 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 is substantial – and explain an important share of aggregate productivity fluctuations for French manufacturing.

Suggested Citation

Mayer, Thierry and Melitz, Marc J. and Melitz, Marc J. and Ottaviano, Gianmarco I.P., Product Mix and Firm Productivity Responses to Trade Competition (July 2016). NBER Working Paper No. w22433, Available at SSRN: https://ssrn.com/abstract=2813881

Thierry Mayer (Contact Author)

Institut d'Etudes Politiques de Paris (Sciences Po) ( email )

Marc J. Melitz

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Gianmarco I.P. Ottaviano

Bocconi University - Department of Economics and Paolo Baffi Centre on Central Banking and Financial Regulation ( email )

Via Gobbi 5
Milan, 20136
Italy

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