Multiproduct firms and markup
by Chaewon Baek & Todd Messer
Many studies in international trade and macroeconomics typically assume that all firms produce only a single product. However, as emphasized by Hottman et al. (2016), multi-product firms actually account for a significant portion of sales and tend to be large. This project aims to investigate the implications of relaxing the assumption of single-product firms. In particular, we examine the importance of product scope in explaining how markups are determined and distributed across firms. First, theoretically, we argue that the definition of a firm-level markup is no longer obvious when one relaxes the assumption of single-product firms. Markups can then vary due to how product scope affects pricing decisions by product. Second, we test the theory in the data by matching bar code level sales to firm production data in order to estimate how markups are related to product scope. Our results have important implications in explaining declining competition since the 1980s and patterns of international trade.