Multi-Product Firms and Flexible Manufacturing in the Global Economy

We present a new model of multi-product firms (MPFs) and flexible manufacturing, and explore its implications in partial and general oligopolistic equilibrium. Globalization affects the scale and scope (or intensive margin and intra-firm extensive margin) of MPFs through a competition effect and a demand effect. The model highlights a new source of gains from trade: productivity increases as firms become leaner and meaner, concentrating on their core competence; but also a new source of losses from trade: product variety may fall. Our results also hold under free entry, which allows in addition for adjustment along the traditional inter-firm extensive margin.