Product Choice and Product Switching

42 Pages Posted: 11 Jun 2003

See all articles by Andrew B. Bernard

Andrew B. Bernard

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Stephen J. Redding

Princeton University

Peter K. Schott

Yale University - School of Management; National Bureau of Economic Research (NBER); Yale University - Cowles Foundation

Multiple version iconThere are 3 versions of this paper

Date Written: May 2003

Abstract

This paper develops a model of endogenous product selection by firms. The theory is motivated by new evidence we present on the importance of product switching by U.S. manufacturers. Two-thirds of continuing firms change their product mix every five years, and product switches involve more than 40% of firm output and almost half of existing products. The theoretical model incorporates heterogeneous firms, heterogeneous products, and ongoing entry and exit. In equilibrium, firm productivity is correlated with product fixed costs, with the most productive firms choosing to make the products with the highest fixed costs. Changes in market structure result in systematic patterns of firm entry/exit and product switching.

Keywords: Heterogeneous Firms, Product Differentiation, Sunk Costs, Entry and Exit

JEL Classification: L11, D21, L60

Suggested Citation

Bernard, Andrew B. and Redding, Stephen J. and Schott, Peter K., Product Choice and Product Switching (May 2003). Available at SSRN: https://ssrn.com/abstract=413420 or http://dx.doi.org/10.2139/ssrn.413420

Andrew B. Bernard (Contact Author)

Dartmouth College - Tuck School of Business ( email )

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National Bureau of Economic Research (NBER)

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Stephen J. Redding

Princeton University ( email )

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HOME PAGE: http://www.princeton.edu/~reddings/

Peter K. Schott

Yale University - School of Management ( email )

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HOME PAGE: http://www.som.yale.edu/faculty/pks4

National Bureau of Economic Research (NBER)

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Yale University - Cowles Foundation

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