Firm Product Scope, Oligopolistic Competition, and the Business Cycle : Evidence and Theory

I investigate changes in product scope, the number of products that a firm offers, over the business cycle and decompose the impact of such changes on aggregate output. By using the Nielsen Retail Scanner data of U.S. consumer goods purchases for 2007- 2014, I find that firm product scope is an important margin of adjustment. The changes at this margin are procyclical on average and heterogeneous across firms of different sizes. Such product scope changes affect aggregate consumption and output by changing the total number of products available in the market and by affecting firms' markups. This decomposition is shown in a model featuring heterogeneous multiproduct firms, oligopolistic competition and free firm entry. When firm-level productivity decreases while the dispersion rises up, firm product scope decreases and sums up to a lower number of product varieties, which disincentivizes consumption. Additionally, the most productive firms acquire higher market shares, consistent with the data, and they charge higher markups as oligopolistic competitors. As a result, the average markup goes up and further decreases consumption