Multi-product firms and increasing marginal costs

Recent literature has addressed how product creation amplifies economic fluctuations via the love of variety. Yet, empirical evidence on variety effects is sparse. The current paper demonstrates that decreasing returns in variety-level production technology, which leads to increasing marginal costs, similarly amplify business cycles. Product scope expansions reduce costs and firms have an incentive produce multiple products even if are entirely absent. efficiency gains from adjusting scopes makes economy more susceptible sunspot equilibria. indeterminate model estimated Bayesian methods data favors multi-product structure with animal spirits explaining a significant fraction U.S.