DP11389 Product Mix and Firm Productivity Responses to Trade Competition

Author(s): Thierry Mayer, Marc J Melitz, Gianmarco Ottaviano
Publication Date: July 2016
Keyword(s):
JEL(s): F1
Programme Areas: International Trade and Regional Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11389

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 multi- product firms and derive the specific demand and cost conditions needed to generate these product-mix reallocations. 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.