TY  - JOUR
AU  - Hottman, Colin
AU  - Redding, Stephen J
AU  - Weinstein, David E
TI  - Quantifying the Sources of Firm Heterogeneity
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 20436
PY  - 2014
Y2  - August 2014
DO  - 10.3386/w20436
UR  - http://www.nber.org/papers/w20436
L1  - http://www.nber.org/papers/w20436.pdf
N1  - Author contact info:
Colin J. Hottman
International Finance Division
20th Street and Constitution Ave N.W.
Washington, D.C. 20551
E-Mail: colin.j.hottman@frb.gov

Stephen J. Redding
Department of Economics &
School of Public and International Affairs
Princeton University
Princeton, NJ 08544
Tel: 609/258-4016
Fax: 609/258-6419
E-Mail: reddings@princeton.edu

David Weinstein
Columbia University
Department of Economics
420 W. 118th Street
MC 3308
New York, NY  10027
Tel: 212/854-6880
Fax: 212/854-8059
E-Mail: dew35@columbia.edu
AB  - We develop and structurally estimate a model of heterogeneous multiproduct firms that can be used to decompose the firm-size distribution into the contributions of costs, “appeal” (quality or taste), markups, and product scope. Using Nielsen bar-code data on prices and sales, we find that variation in firm appeal and product scope explains at least four fifths of the variation in firm sales. We show that the imperfect substitutability of products within firms, and the fact that larger firms supply more products than smaller firms, implies that standard productivity measures are highly dependent on implicit demand system assumptions and probably dramatically understate the relative productivity of the largest firms. Although most firms are well approximated by the monopolistic competition benchmark of constant markups, we find that the largest firms that account for most of aggregate sales depart substantially from this benchmark, and exhibit both variable markups and substantial cannibalization effects.
ER  -