How do you like what you like? The role of consumer preferences in manufacturing plants’ performance

María Paula Álvarez Arboleda
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María Paula Álvarez Arboleda: Universidad de los Andes

No 2025-28, Documentos CEDE from Universidad de los Andes, Facultad de Economía, CEDE

Abstract: This paper investigates the role of consumer preferences in shaping the performance of manufacturing firms in Colombia. I use data from Colombian manufacturing firms between 2000 and 2012 to decompose the contribution of consumer preferences into those attributable to preferences for certain goods (horizontal differentiation) and for particular providers of those goods (vertical differentiation). Employing a model that integrates consumer demand, following a nested CES structure, with firm production, I use key demand parameters to decompose the variance of firm sales into technical efficiency, input costs, and vertical and horizontal differentiation. I find that vertical differentiation plays a dominant role in explaining sales variance (85.9%), while horizontal differentiation and technical efficiency contribute to a lesser extent (26.2% and 29.2%, respectively). These findings underscore the importance of consumer preferences in determining firm outcomes, showing that demand-driven factors, frequently subsumed in productivity measures, outweigh traditional supply-side drivers that explain firms’ performance.

Keywords: size of manufacturing firms; quality; differentiation; productivity; preferences (search for similar items in EconPapers)
JEL-codes: D22 D24 L25 L60 O47 (search for similar items in EconPapers)
Pages: 38
Date: 2025-09
New Economics Papers: this item is included in nep-com, nep-dcm, nep-eff, nep-ind and nep-sbm
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Published in Documentos CEDE - Universidad de los Andes

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Persistent link: https://EconPapers.repec.org/RePEc:col:000089:021544

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