TY  - JOUR
AU  - Feenstra,Robert
AU  - Ma,Hong
TI  - Optimal Choice of Product Scope for Multiproduct Firms under Monopolistic Competition
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13703
PY  - 2007
Y2  - December 2007
UR  - http://www.nber.org/papers/w13703
L1  - http://www.nber.org/papers/w13703.pdf
N1  - Author contact info:
Robert C. Feenstra
Department of Economics
University of California, Davis
One Shields Avenue
Davis, CA  95616
Tel: 530/752-7022
Fax: 530/752-9382
E-Mail: rcfeenstra@ucdavis.edu

Hong Ma
Department of Economics
University of California, Davis
Davis, CA  95616
E-Mail: hhma@ucdavis.edu
AB  - In this paper we develop a monopolistic competition model where firms exercise their market power across multiple products. Even with CES preferences, markups are endogenous. Firms choose their optimal product scope by balancing the net profits from a new variety against the costs of "cannibalizing" their own sales. With identical costs across firms, opening trade leads to fewer firms surviving in each country but more varieties produced by each of those firms. With heterogeneous costs, the number of firms surviving in equilibrium is quite insensitive to the market size. When trade is opened, more firms initially enter, but the larger market size reduces the cannibalization effect and expands the optimal scope of products. As a result, the less efficient firms exit, and the larger market is accommodated by more efficient firms that produce more varieties per firm on average.
ER  -