Andrea Pozzi

Demand or productivity: What determines firm growth?

We disentangle the contribution of unobserved heterogeneity in idiosyncratic demand and productivity to firm growth. We use a model of monopolistic competition with Cobb-Douglas production and a dataset of Italian manufacturing firms containing unique information on firm-level prices to reach three main conclusions. First, demand shocks are at least as important as productivity shocks for firm growth. Second, firms respond to shocks less than a frictionless model would predict, suggesting the existence of adjustment frictions. Finally, the degree of under-response is much larger for TFP shocks. This implies the existence of frictions with differential effects according to the nature of the shock, unlike the typical frictions studied by the literature on factor misallocation. We consider hurdles to firm reorganization as one such friction and show that they hamper firms’ responses to TFP shocks but not to demand shocks.

Price Dynamics with Customer Markets

We study a tractable model of firm price setting with customer markets and empirically evaluate its predictions. Our framework captures the dynamics of customers in response to a change in the price, describes the behavior of optimal prices in the presence of customer acquisition and retention concerns, and delivers a general equilibrium model of price and customer dynamics. We exploit novel micro data on purchases from a panel of households from a large U.S. retailer to quantify the model and compare it to the counterfactual benchmark of the standard monopolistic competition setting. We show that a model with customer markets has markedly different implications in terms of the equilibrium price distribution, which better fit the available empirical evidence on retail prices. Moreover, the dynamic of the response of demand to shocks that affects price dispersion is also distinctive. Our results suggest that inertia in customer reallocation across firms increases the persistence in the response of demand to these shocks.

Entry Regulation in Retail Markets

We survey the empirical literature analyzing the consequences of entry regulation in retail industries. We begin by providing some background on the most common forms of entry regulation and their rationales. We use OECD data to show evidence of a general trend towards less stringent entry regulation in the past 15 years. However, substantial heterogeneity persists across countries. Next, we review a number of empirical contributions that analyze the effects of entry regulation on market outcomes. We compare studies relying on quasi-experimental variation in regulation to those based on structural models and comment on strengths and challenges of each approach. We summarize the results obtained by the literature with respect to several important outcomes that entry regulation can be expected to affect, such as market structure, entry, productivity and employment. We conclude presenting a few relevant topics that the literature has yet to address and, therefore, represent promising avenues for future research.