Spillovers and Redistribution through Intra-Firm Networks: The Product Replacement Channel

Abstract

This paper studies how regional shocks spillover across U.S. local markets through intra-firm market networks and explores how such spillovers reshape household welfare across regions. We identify the spillover by linking data on barcode-region-level prices and quantities with producer-level information and by exploiting variation in firms exposure to sudden differential drops in local house prices. We find that a firm s local sales decrease in response not only to a direct negative local demand shock but also more strongly to indirect negative demand shocks originating in its other markets. The intra-firm cross-market spillover effects occur because (i) firms replace products that have higher value---sales per product, unit price, and organic sales share---with lower-value ones in response to negative demand shocks, and (ii) such product replacements are synchronized across many markets within each firm. Counterfactual analysis using an estimated multi-region model with endogenous quality adjustment shows that our channel generates a novel inter-regional shock transmission, which leads to an economically sizable regional consumption redistribution during the Great Recession.