Who can produce what? Firm capabilities and product entry

Luca Macedoni, John Morrow and Vladimir Tyazhelnikov

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Which firms supply which products? Modelling multi-product firms under heterogeneous markups, we recover firms? costs for produced products and develop an algorithm inspired by recommender systems to predict costs for unproduced products. Lower predicted costs imply increased product adoption and identify which firms enter when export demand rises, including firms crossing broad product classifications. We use these counterfactual costs to quantify how reductions in fixed and marginal costs induce product entry and lower price indices. In a price-stabilization exercise following a cost shock, entry subsidies can cost less than subsidies to incumbents, particularly for smaller shocks when capable potential entrants remain available.

Keywords: multi-product firms; firm capabilities; classification; industrial policy (search for similar items in EconPapers)
JEL-codes: D20 F10 L10 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2026-10-12
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