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

We study how regional shocks spill over across US local markets through intra-firm market networks and explore how such spillovers reshape household welfare across regions. We identify spillovers 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 to a direct negative local demand shock and do so more strongly to indirect negative demand shocks originating in its other markets. The intra-firm cross-market spillover effects occur because (i) firms replace higher-value products---higher sales per product, unit price, and organic sales share---with lower-value products in response to negative demand shocks, and (ii) such product replacements are synchronized across markets within each firm. Counterfactual analysis using multiregion model with endogenous quality adjustment shows that our channel generates a novel and economically sizable regional redistribution effect during the Great Recession