Product switching, market power and distance to core competency

Rémi Monin (Insee-Dese – Département des études économiques – Division « Marchés et entreprises»), Milena Suarez Castillo (Insee-Dese – Département des études économiques – Division « Marchés et entreprises» et CREST)

Documents de travail
No G2020-06
Paru le :Paru le21/09/2020
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Rémi Monin (Insee-Dese – Département des études économiques – Division « Marchés et entreprises»), Milena Suarez Castillo (Insee-Dese – Département des études économiques – Division « Marchés et entreprises» et CREST)
Documents de travail No G2020-06- September 2020

Within-firm product switching is recognised as an important source of growth. We examine how portfolio dynamics is related to product market power, product efficiency and within-firm differentiation. We derive perproduct markup and marginal cost following De Loecker et al. (2016) on a large panel of French manufacturers over 2009-2017 and build three novel measures of product similarity. We find that selection based on performance is a leading driver of the performance gap between entrant and incumbent products. Markups are as important as marginal costs in explaining selection patterns. Our results suggest that firms renew their portfolio using trial and error and select the best performing products, closer to their core competency. However at the firm level, most of markup growth is accounted for by a reallocation toward best performing products, with a minor role for product entry and exit in the short run.