This paper examines the frequency, pervasiveness, and determinants of prod uct switching by US manufacturing firms. We find that one-half of firms alter their mix of five-digit SIC products every five years, that product switching is correlated with both firm- and firm -product attributes, and that product adding and dropping induce large changes in firm scope. The behavior we observe is consistent with a natural generalization of existing theories of industry dynam ics that incorporates endogenous product selection within firms. Our findings suggest that product switching contributes to a reallocation of resources within firms toward their most efficient use. (JEL LI 1, L21, L25, L60) The extent to which resources are allocated to their best use is a core issue of economics. Until now, research into industry dynamics has addressed this issue by focusing almost exclusively on the contribution of firm entry and exit to resource reallocation, that is, whether newly created firms or plants are more productive than the dying firms and plants they replace.1 This paper examines a new, "extensive" margin of firm adjustment, the reassignment of resources that takes place within surviving firms as they add and drop (i.e., "switch") products. Our analysis of product switching makes use of a unique longitudinal dataset that tracks US firms' product-level manufacturing output across quinquennial US Manufacturing Censuses

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Multiple-Product Firms and Product Switching

Drawing on uncommonly rich and representative data from the Colombian manufacturing census, this paper documents new empirical relationships between input prices, output prices, and plant size and proposes a model of endogenous input and output quality choices by heterogeneous firms to explain the observed patterns. The key empirical facts are that, on average within narrowly defined sectors, (1) larger plants charge more for their outputs and (2) larger plants pay more for their material inputs. The latter fact generalizes the well-known positive correlation between plant size and wages. Similar correlations hold between prices and export status. We show that the empirical patterns are consistent with a parsimonious extension of the Melitz (2003, “The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity,” Econometrica, 71 , 1695–1725) framework to include endogenous choice of input and output quality. Using a measure of the scope for quality differentiation from Sutton (1998, Technology and Market Structure: Theory and History . Cambridge: MIT Press), we show that differences across sectors in the relationships between prices and plant size are consistent with our model. Available evidence suggests that differences in observable measures of market power do not provide a complete explanation for the empirical patterns. We interpret the results as supportive of the hypothesis that quality differences of both inputs and outputs play an important role in generating the price–plant size correlations.

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Prices, Plant Size, and Product Quality

Large exporters are simultaneously large importers. In this paper, we show that this pattern is key to understanding low aggregate exchange rate pass-through as well as the variation in pass-through across exporters. First, we develop a theoretical framework that combines variable markups due to strategic complementarities and endogenous choice to import intermediate inputs. The model predicts that fi rms with high import shares and high market shares have low exchange rate pass-through. Second, we test and quantify the theoretical mechanisms using Belgian fi rm-product-level data with information on exports by destination and imports by source country. We confi rm that import intensity and market share are the prime determinants of pass-through in the cross-section of fi rms. A small exporter with no imported inputs has a nearly complete pass-through of over 90 percent, while a fi rm at the 95th percentile of both import intensity and market share distributions has a pass-through of 56 percent, with the marginal cost and markup channels playing roughly equal roles. The largest exporters are simultaneously highmarket-share and high-import-intensity fi rms, which helps explain the low aggregate pass-through and exchange rate disconnect observed in the data.

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Importers, Exporters, and Exchange Rate Disconnect

This paper establishes six stylized facts about firms' export prices using detailed customs data on the universe of Chinese trade flows. First, across firms selling a given product, exporters that charge higher prices earn greater revenues in each destination, have bigger worldwide sales, and enter more markets. Second, firms that export more, that enter more markets and that charge higher export prices import more expensive inputs. Third, across destinations within a firm-product, firms set higher prices in richer, larger, bilaterally more distant and overall less remote countries. Fourth, across destinations within a firm-product, firms earn bigger revenues in markets where they set higher prices. Fifth, across firms within a product, exporters with more destinations offer a wider range of export prices. Finally, firms that export more, that enter more markets and that offer a wider range of export prices pay a wider range of input prices and source inputs from more origin countries. We propose that trade models should incorporate two features to rationalize these patterns in the data: more successful exporters use higher-quality inputs to produce higher-quality goods (stylized facts 1 and 2), and firms vary the quality of their products across destinations by using inputs of different quality levels (stylized facts 3, 4, 5 and 6).

Export Prices Across Firms and Destinations

This article establishes six stylized facts about firms' export prices using detailed customs data on the universe of Chinese trade flows. First, across firms selling a given product, exporters that charge higher prices earn greater revenues in each destination, have bigger worldwide sales, and enter more markets. Second, firms that export more, enter more markets, and charge higher export prices import more expensive inputs. Third, across destinations within a firm-product, firms set higher prices in richer, larger, bilaterally more distant and overall less remote countries. Fourth, across destinations within a firm-product, firms earn bigger revenues in markets where they set higher prices. Fifth, across firms within a product, exporters with more destinations offer a wider range of export prices. Finally, firms that export more, enter more markets, and offer a wider range of export prices pay a wider range of input prices and source inputs from more origin countries. We propose that trade models should incorporate two features to rationalize these patterns in the data: more successful exporters use higher quality inputs to produce higher quality goods (stylized facts 1 and 2), and firms vary the quality of their products across destinations by using inputs of different quality levels (stylized facts 3, 4, 5, and 6). Copyright 2012, Oxford University Press.

https://www.nber.org/system/files/working_papers/w15342/w15342.pdf

Markups, quality, and transport costs

This paper analyzes the transfer pricing of multinational firms. Intrafirm prices may systematically deviate from arm’s-length prices for two motives: pricing to market and tax avoidance. Using Fre...

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Knocking on Tax Haven's Door: Multinational Firms and Transfer Pricing

https://www.isabellemejean.com/MartinMejean_June13.pdf

Low-wage country competition and the quality content of high-wage country exports

Volatility in the small and in the large: The lack of diversification in international trade

This paper presents a theoretical discussion and an empirical investigation of the impact of distance on the spatial pricing policy of exporting firms. The theoretical part points out the importance of transport costs formulation to determine how distance impacts fob prices. Assuming additive or iceberg transport costs might imply opposite predictions concerning this relationship. The empirical analysis is based on French export data providing us with bilateral export unit values at the firm and product level. The main empirical result is that French exporters set higher prices toward the more remote markets. This finding goes against the predictions of the main models of international trade (with or without quality) predicting either a nil or a negative impact of distance on prices at the firm level. It also questions the use of iceberg transport costs. A way to reconcile theory with the data is to introduce additive transport costs.

Julien Martin

Papers

Markups, quality, and transport costs

Knocking on Tax Haven's Door: Multinational Firms and Transfer Pricing

Low-wage country competition and the quality content of high-wage country exports

Volatility in the small and in the large: The lack of diversification in international trade

Spatial Price Discrimination in International Markets