Eckel / Neary 1 Multi-Product Firms and Flexible Manufacturing in the Global Economy J. Peter Neary University of Oxford and CEPR

Eckel / Neary 2 Evidence on Multi-Product Firms Multi-product firms (MPFs) … Bernard, Redding, Schott (2006) -are present in all industries -typically coexist with single-product firms -account for 41% of the total number of firms 91% of total output -are very active in varying their product mix (50% both add and drop products, 30% drop only, 8% add only during average 5 year interval)

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4 Literature on Multi-Product Firms Existence, Market Structure, and Diversification: Brander-Eaton (1984); Klemperer (1992); Eaton- Schmitt (1994); Baldwin-Ottaviano (2001); Johnson-Myatt (2003, 2006); Grossmann (2005) Free Entry Models based on Fixed Costs: Ottaviano-Thisse (1999); Baldwin, Gu (2005); Allanson-Montagna (2005) MPFs and Trade: Evidence and Theory Bernard-Redding-Schott (2005, 2006); Nocke- Yeaple (2005)

Eckel / Neary 5 Our Contribution Develop a new model of multi-product firms (MPFs) based on flexible manufacturing Explore intra-firm adjustments within MPFs in partial and general oligopolistic equilibrium (GOLE) Show how the existence of MPFs alters predictions of conventional trade models

Eckel / Neary 6 Overview of the Model General Oligopolistic Equilibrium (GOLE) [Neary (2002)] Continuum of identical industries  [0,1], k identical countries, MPFs in all [D.P. has asymmetric countries and industries: similar results] Globalization: –Increase in the number of countries –Both a market-size and a competition effect

Eckel / Neary 7 Outline Consumers and Firms Industry Equilibrium –Scale and Scope of MPFs –Comparative Statics General Equilibrium –The Global Economy –Adjustment to Globalization Extensions –Country/Firm Asymmetries –Free Entry

Eckel / Neary 8 Outline Consumers and Firms Industry Equilibrium –Scale and Scope of MPFs –Comparative Statics General Equilibrium –The Global Economy –Adjustment to Globalization Extensions –Country/Firm Asymmetries –Free Entry

Eckel / Neary 9 Preferences and Demand Continuum Quadratic Preferences: Neary (JEEA 2003), Ottaviano-Tabuchi-Thisse (IER 2002) Inverse World Market Demand:

Eckel / Neary 10 Costs and Technology of Multi-Product Firms Demand: Profits: Firm Output: F.O.C. Scale: F.O.C. Scope: Flexible Manufacturing:

Eckel / Neary 11 Flexible Manufacturing "Core Competence" Product Range

Eckel / Neary 12 First Order Condition: Scale "Cannibalization Effect"

Eckel / Neary 13 First Order Condition: Scope "Core Competence" Product Range

Eckel / Neary 14 Equilibrium Output Profile "Core Competence" Product Range

Eckel / Neary 15 Multi-Product Firms (cont.) Prices vary across varieties Compare models with fixed costs: e.g., Nocke-Yeaple Higher prices and lower profit margins on goods further from a firm’s core competence Prices: Price-Cost Margins: [“km” is the competition effect; “-1” is the cannibalization effect]

Eckel / Neary 16 Scale and Scope Combined Firm Scope: Industry Output: Y=kmX Firm Scale: i.e., 2 equations in X and  Combine:  (  ): Cost savings from flexible manufacturing

Eckel / Neary 17 First Order Condition: Scope "Core Competence" Product Range Cost savings from flexible manufacturing

Eckel / Neary 18 Outline Consumers and Firms Industry Equilibrium –Scale and Scope of MPFs –Comparative Statics General Equilibrium –The Global Economy –Adjustment to Globalization Extensions –Country/Firm Asymmetries –Free Entry

Eckel / Neary 19 FOC: Scope X Scope:  (X) Industry Output: Y=kmX

Eckel / Neary 20 FOC Scale Scale: X(  ) X

Eckel / Neary 21 Figure 3: Industry Equilibrium Scale: X(  ) X Scope:  (X)

Eckel / Neary 22 Market-Size Effect of Globalization Scale: X(  ) X Scope:  (X)

Eckel / Neary 23 Market-Size Effect on Output Profile Product Range

Eckel / Neary 24 Competition Effect of Globalization Scale: X(  ) X Scope:  (X)

Eckel / Neary 25 Competition Effect on Output Profile Product Range

Eckel / Neary 26 Full Effect of Globalization Scale: X(  ) X Scope:  (X)

Eckel / Neary 27 Intra-Firm Adjustment

Eckel / Neary 28 Intra-Firm Adjustment X rises, so infra-marginal products must increase

Eckel / Neary 29 Intra-Firm Adjustment Outputs rise Outputs fall

Eckel / Neary 30 Impact on Productivity Proof here for X; also holds for a price-weighted Divisia Index Output: Labour Demand: Productivity: This is decreasing in  So: globalization encourages “leaner” firms

Eckel / Neary 31 Impact on Product Variety Low Flexibility High Flexibility

Eckel / Neary 32 Partial Equilibrium Results Proposition 1:In partial equilibrium, an increase in competition reduces δ and X but raises Y. An increase in the size of the market increases both X and Y but leaves δ unaffected. Proposition 2:Firm productivity depends negatively on  and on nothing else. Hence it rises when competition increases but is independent of the size of the market. Proposition 3:In partial equilibrium, the impact of globalization on N depends on the degree of flexibility in manufacturing. If flexibility is low, N rises as k increases, otherwise N falls. A necessary condition for a fall in N is that costs are concave in varieties.

Eckel / Neary 33 Outline Consumers and Firms Industry Equilibrium –Scale and Scope of MPFs –Comparative Statics General Equilibrium –The Global Economy –Adjustment to Globalization Extensions –Country/Firm Asymmetries –Free Entry

Eckel / Neary 34 Overview of GE Model 3 Equations: Firm Scope: Firm Scale: Labour Market Equilibrium:

Eckel / Neary 35 Scale and Scope in General Equilibrium Firm Scope: Recap: Firm Scale:

Eckel / Neary 36 Industry Equilibrium X w IE: X(w)

Eckel / Neary 37 Labour Market L D Multi-product Firms: Labour Market Equilibrium: Combine with FOC (scale): Combine with FOC (scope):

Eckel / Neary 38 Labour-Market Equilibrium X w LL: w(X)

Eckel / Neary 39 Figure 5: General Equilibrium X w LL: w(X) IE: X(w)

Eckel / Neary 40 Adjustment to Globalization in GE: Summary Market-size and competition effects as in PE Responses of X and  as in PE Wage rate may rise or fall (presumptively rises in linear case) Product range more likely to fall when w rises

Eckel / Neary 41 Outline Consumers and Firms Industry Equilibrium –Scale and Scope of MPFs –Comparative Statics General Equilibrium –The Global Economy –Adjustment to Globalization Extensions –Country/Firm Asymmetries –Free Entry

Eckel / Neary 42 Multi-product firms with longer product lines and more flexible technology tend to respond more to shocks Industry Equilibrium: Heterogeneous Firms

Eckel / Neary 43 In free-entry equilibrium, profits are: Decreasing in m: Negative competition effect Increasing in L: Positive market-size effect Increasing in k: Market-size effect dominates Hence: Rise in k encourages entry, reinforcing earlier results: Firm output may fall, but national output mX must rise  falls, so productivity rises Free Entry Profits:

Eckel / Neary 44 i.e., Effect on diversity is qualitatively the same as in no- entry case, but magnified in absolute value Free Entry (cont.) Effect on Product Diversity: Effect on diversity with no entry Recall: No market-size effect on diversity with no entry Magnification effect

Eckel / Neary 45 Conclusion Globalization can have a considerable impact on both scale and scope of multi-product firms Introduces a new margin of adjustment: Intra-firm extensive margin “Cannibalization effect” crucial →Oligopoly important Impact on scope depends on wage effects →General equilibrium important New source of gains from trade: productivity increases, as firms become “leaner”: concentrate on their core competence New source of losses from trade: Variety may fall Impact on variety depends on flexibility → Fall in diversity possible even with symmetry & w/out entry Entry (inter-firm extensive margin) reinforces intra-firm effect

Eckel / Neary 46 Thank you!