Strategic Product Diversity
59 Pages Posted: 2 Dec 2019
Date Written: November 16, 2019
We document a decreasing pattern in product concentration within multi-product firms since the early 2000s. Larger firms are increasingly selecting a more diverse product range outside of their core competence. Expanding firm boundaries is closely intertwined with rising industry concentration as industry leaders are consolidating market power by growing horizontally through product creation. We build a general equilibrium model of multi-product firms featuring endogenously fluctuating firm and industry boundaries. External financing costs are quantitatively important for explaining the negative relation between product and industry concentration. The growing importance of the intra-firm extensive margin contributes to the aggregate productivity slowdown and declining trend in idiosyncratic volatility.
Keywords: Firm Boundary, Multi Product Firm, Asset Pricing, Imperfect Competition, Financial Frictions, Idiosyncratic Volatility, Productivity, Secular Trends
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