Productivity in a Differentiated Products Market Equilibrium∗

This paper is about estimating productivity in the presence of product differentiation and in the absence of ideal data. By appealing to standard notions of market equilibrium and imposing structure on consumer demand, we show how one can estimate productivity when: 1) plant-level information about the physical attributes of output are not available; 2) the available measure of output is plant sales; and 3) plants produce differentiated products and may produce more than one product variety. In our experience, this set-up is very common. Even very detailed manufacturing censuses do not typically record information about the physical attributes of the plant’s output(s). Further, output is typically measured not in physical units but rather in terms of dollars— i.e. sales. Lastly, we cannot identify an industry in which every plant produces exactly the same product. Rather, plants produce differentiated products that, for administrative reasons, are classiÞed within a given industry code and this holds true at even the most disaggregated industry deÞnitions. The literatures on estimating productivity and on estimating demand in differentiated products markets have progressed in recent years but without much reference to one another. On the productivity side, a line of research initiated by Olley and Pakes (1996) has made signiÞcant ∗This research is in progress. When we are further along, it will qualify as “Preliminary.” Please direct comments to Levinsohn at [email protected] or to Melitz at [email protected].