Large Firms in Retail Markets: Multiple Products for Heterogeneous Consumers

49 Pages Posted: 5 Nov 2019 Last revised: 28 Sep 2020

See all articles by Luca Macedoni

Luca Macedoni

Aarhus University

Mingzhi Xu

Peking University - Institute of New Structural Economics

Robert C. Feenstra

University of California, Davis - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: September 27, 2020

Abstract

We study the ability of firms of various sizes to cater to the taste of consumers who differ in their geographic location, store choice, and type or purchase history. Using data on purchases at the household-barcode level from Nielsen, we find that heterogeneity across consumer segments accounts for 39% of the variation in product appeal, which is a key determinant of firm size. Using a model with heterogeneous consumers, we find that consumer heterogeneity increases markups and profits, and such a positive effect is more pronounced for large firms. Furthermore, we find a link between firm size heterogeneity and the strategies firms follow in the presence of heterogeneous consumer segments. While smaller firms cater to the taste of few segments, typically the largest ones, larger firms exploit their wider scope to target a larger number of segments, both large and niche. Our quantitative model rationalizes the difference in strategies with the presence of segment-specific market costs.

Keywords: Firm heterogeneity; multi-product firm; consumer heterogeneity; scanner data

JEL Classification: D12, L11, L25, O51

Suggested Citation

Macedoni, Luca and Xu, Mingzhi and Feenstra, Robert C., Large Firms in Retail Markets: Multiple Products for Heterogeneous Consumers (September 27, 2020). Available at SSRN: https://ssrn.com/abstract=3475289 or http://dx.doi.org/10.2139/ssrn.3475289

Luca Macedoni (Contact Author)

Aarhus University ( email )

Nordre Ringgade 1
DK-8000 Aarhus C, 8000
Denmark

Mingzhi Xu

Peking University - Institute of New Structural Economics ( email )

Bejing, AK Bejing
China

Robert C. Feenstra

University of California, Davis - Department of Economics ( email )

One Shields Drive
Davis, CA 95616-8578
United States
916-752-9240 (Phone)
916-752-9382 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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