Firms don’t just differ in how efficiently they produce goods or services. They also differ in how many customers they can reach. That simple reminder is at the heart of new research by Mahmood Haddara, a PhD candidate with the Department of Economics. According to traditional economic models, the reason some firms in the same industry are bigger than others can be explained by their greater productivity and manufacturing efficiency. According to Haddara’s model, there is one more essential measure at play. The number of customers the firms can access. When analysis of productivity and customer access aren’t both considered, Haddara argues, research there isn’t a fulsome view of economic policy that affects everything from subsidy programs to how firms are taxed.
“I was curious,” Haddara said. ““How often are highly productive firms held back by low customer access? Maybe there is a product you’re completely unaware of that’s better than the brand name version you use every day. Maybe there’s a small entrepreneur that can’t break into the market because they don’t have the same reach as the big companies. My model suggests that these scenarios are important for understanding the economy”
To describe his results, Haddara encourages listeners to conduct a thought experiment. Imagine a small diner suddenly given all the attributes of McDonald’s. They have the same product quality, efficiency, and reputation. Even then, a huge difference in revenue between the McDonalds and the diner would be expected because McDonald’s has access to a global customer base.
“That kind of difference isn’t just about productivity,” Haddara said. “It’s about customer access.”
If the size of firms is dependent on their market share, then customer access may sound like an intuitive addition to any analysis of how firms grow. When Haddara applied his model, he designed it to allow for firms that are highly productive, but have limited customer access, and vice versa. His analysis reflected situations like small businesses with great products but limited visibility, or large firms that are growing due to brand recognition and reach. By modeling customer accumulation as a gradual and uncertain process, the framework captures how firms grow and compete over time.
“Any firm has two elements to it. One side is production, and one side is finding customers to sell to. These things have to stay somewhat aligned because you only have limited capacity for production,” Haddara said. “Large changes in customer access take time for the productive side of the firm to catch up. What I focus on is more gradual increases, like opening another location or running ads to reach more people. That’s how most businesses operate in the real world.”
Haddara’s research has real world implications. New businesses are often created with the help of government programs that offer grants and other forms of subsidies for employment training, or equipment costs, for example. This model suggests that subsidizing customer accumulation through advertising, or expansion via another location, can significantly boost economic welfare for everyone.
“Just like we have R&D subsidies, this would support firms trying to reach more customers,” Haddara said. “My model shows that the optimal subsidy rate is 36%, which is quite high. It raises aggregate welfare by 4% in consumption terms. It’s basically like giving every household a 4% raise that lasts forever. That’s a substantial gain and shows that customer accumulation is a powerful avenue for policy.”
These ideas have been subject to examination by the community Haddara and his colleagues have built at the Department of Economics where Haddara, as both a student and PhD-level teaching assistant, encourages department members to listen to each other’s presentations, give feedback, and help each other prepare, even across fields.
“Building community at a large institution like U of T is challenging, but I’ve found that the smaller-scale connections, within the macro group, for example, have been incredibly impactful,” he said. “It’s easier to connect with a group of 20 than with 20,000, and those relationships have helped me feel grounded and supported throughout the program.”
Faculty have also noticed how Haddara combines and shares his research, expertise and willingness to contribute to community-building.
“Mahmood’s research combines strong theoretical skills with rich data analysis,” said Professor Burhan Kuruscu, his co-supervisor. “He is creative and thinks outside the box, often approaching problems from fresh and original perspectives. He conducts research tasks and projects carefully, accurately, and with great attention to detail, while working with remarkable speed and efficiency. Mahmood is very entrepreneurial; he initiates and coauthors projects with other students and faculty, contributing energy and collaboration to the research environment. His creativity, discipline, and efficiency consistently translate into high-quality work.”
Return to the Department of Economics website.
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