Market Size, Competition, and the Product Mix of Exporters.pdf

American Economic Review 2014, 104(2): 495–536 http://dx./. 495 Market Size , Competition , and the Product Mix of Exporters ? By Thierry Mayer, Marc J. Melitz, and Gianmarco I. P. Ottaviano* We build a theoretical model of multi-product firms that highlights petition across market destinations affects both a firm’s exported product range and product mix. We show how tougher competition in an export market induces a firm to skew its export sales toward its best performing products. We find very strong confirmation of petitive effect for French exporters across export market destinations. Theoretically , this within-firm change in product mix driven by the trading environment has important repercussions on firm productivity. A calibrated fit to our theoretical model reveals that these productivity effects are potentially quite large. ( JEL D21, D24, F13, F14, F41, L11 ) Exports by multi-product firms dominate world trade flows. Variations in these trade flows across destinations reflect in part the decisions by multi-product firms to vary the range of their exported products across destinations with different mar - ket conditions. 1 In this paper, we further analyze the effects of those export market conditions on the relative export sales of those goods: we refer to this as the firm’s product mix choice. We build a theoretical model of multi-product firms that high - lights how market size and geography (the market sizes of, and bilateral economic distances to, trading partners ) affect both a firm’s exported product range and its exported product mix across market destinations. Differences in market sizes and geography generate differences in the toughness petition across markets. petition shifts down the entire distribution of markups across products and induces firms to skew their export sales toward their better performing products. We find very strong confirmation of petitive effect for French exporters 1See Maye