The Good of Aggregation
Growing personal income inequality has taken a central role in the public debate on the effects of globalization. Some observers have highlighted a parallel evolution with regard to companies in terms of an increase in market concentration, as market share gets lionized a small group of large "superstar" companies. In a study with Thierry Mayer (Sciences Po) and Marc Melitz (Harvard), titled "Product mix and firm productivity responses to trade competition", which recently appeared in the Review of Economics and Statistics of the Harvard Kennedy School of Government, we explain how the increase in market concentration may derive not only from changes in competition regimes (related, for example, to antitrust policies), but also from the growth in demand associated with access to new or growing export markets. In the latter case, increasing market share concentration can also have a positive impact on aggregate productivity.
To highlight this mechanism, the study analyzes how French multiproduct companies respond to changes in demand on export markets by reviewing the number and quantities of products offered, and how this revision generates a virtuous reallocation of their production factors from less competitive product lines to more competitive ones, thus increasing business productivity. Measuring these effects within multi-product firms rather than at the industry level has several advantages. First, changes in industry demand do not depend on the action of individual firms and can therefore be identified much more easily than at a higher level of aggregation. Secondly, it is possible to factor in technological and organizational changes occurring at the level of the individual company. Third, reallocations can be measured for the same set of products, strictly defined and sold by the same firm in various export markets at different times. Fourth, barriers to reallocation are likely to be substantially higher across different firms than between product lines of the same firm. Finally, multi-product firms dominate both world production and international trade flows.
The study finds very strong empirical confirmation of the correlation between changes in demand on export markets, reallocations of production factors between product lines, and the productivity of French multi-product companies. It also shows that these effects have important implications for French aggregate productivity: between 1995 and 2005, variations in demand in French export markets led to an average annual increase of 1 percent in the country's manufacturing productivity.
These results add to what is already known about the effects of international trade on the productivity of firms through the reallocation of production factors. In a 2014 article, titled "Market Size, Competition, and the Product Mix of Exporters" and published in the American Economic Review, with the same authors showed that French multiproduct companies tend to offer only their best products in "more difficult" export markets, i.e. those where competition from other countries' companies is more intense. A similar behavior was also found for companies in Canada, Mexico and the United States, in the analysis of the consequences of the North American trade liberalization, in particular in relation to the North American Free Trade Agreement (NAFTA), and more recently with respect to the Canada-United States Free Trade Agreement (CUSFTA) enacted by Donald Trump during his presidency.