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A Model of Firm Experimentation under Demand Uncertainty: an Application to Multi-Destination Exporters

Cristina Mitaritonna () and Zhanar Akhmetova

Working Papers from CEPII research center

Abstract: Firm level data exhibits that new exporters tend to start small, a large fraction of these drops out by the second year of exporting, and the survivors expand rapidly. To take into account this stylized fact, we propose a theory of firm behavior that assumes demand uncertainty about the profitability of exporting in a new market. The firm can postpone paying the sunk cost of full-scale entry and test the market by observing individual sales to a few consumers. The firm optimally chooses the experimentation intensity, as well as the exit/entry policy. Applying Bayesian econometric techniques, we structurally estimate the model using French firm-level export data. A given geographical regions is viewed as a target market,and countries within the region as consumers. The estimate of the sunk cost is higher than in a model where the sunk cost cannot be postponed, like Melitz (2003). We also perform counterfactual simulations (exchange rate, sunk cost and experimentation cost).

Keywords: Demand Uncertainty; Optimal Experimentation; Heterogeneous Producers; New Exporter Dynamics; Structural Estimations; Bayesian Methods (search for similar items in EconPapers)
JEL-codes: D21 D83 F14 C11 C33 (search for similar items in EconPapers)
Date: 2013-04
New Economics Papers: this item is included in nep-int
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