The Demand Side of Firm Growth: Evidence from Mexico

When information frictions prevent consumers from discerning the quality of products, they may prefer to buy from firms with an established reputation. This can hinder the growth of small or new firms with high-quality goods, negatively contributing to the aggregate output growth. This paper investigates how uncertainty about product quality differentially affects domestic and international firms in Mexico, where the latter firms tend to be larger in size. In the Mexican consumer goods industry, there exist concerns about product quality and consumers pay a high price for goods carrying global brands. Leveraging barcode-level consumption data, I document the following novel facts about this industry: 1) domestic firm growth is driven by surviving goods rather than new goods; 2) domestic goods have slower and longer lifecycles than foreign goods; 3) the extensive customer margin is key to growth for both types of firms; 4) domestic firms, however, depend relatively more on the intensive margin for growth; and 5) new customers of older goods are poorer than those of new goods, only in the case of domestic firms. I rationalize these findings by developing a model of product choice under quality uncertainty. The possibility of learning from others makes the most price-sensitive customers delay purchasing new domestic products, driving down domestic firm profits. I provide empirical evidence consistent with the model’s mechanisms, which highlight the importance of individual learning, product quality uncertainty, and price-sensitivity.

Zoom link:
18 January 2022, 13:30 – 14:15 (Tuesday)

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