Tremendous differences in producer productivity levels exist, even within narrowly defined industries. This paper explores the influence of product substitutability in an industry on this disparity. When consumers can easily switch between producers, inefficient (high-cost) producers cannot operate profitably. Thus high-substitutability industries should exhibit less productivity dispersion and have higher average productivity levels. I demonstrate this mechanism in a simple industry equilibrium model and test it empirically using producer-level data from 443 U.S. manufacturing industries. I find evidence that substitutability measured in several ways'is indeed negatively related to within-industry productivity dispersion and positively related to median productivity.

I thank seminar participants at the NBER Summer Institute, the Brookings Institution, and the Center for Economic Studies for their comments. Mark Roberts made several helpful suggestions regarding an earlier draft. I am also grateful to John Haltiwanger, Rachel Kranton, Mike Pries, Plutarchos Sakellaris, and John Shea for their instruction and guidance. Funding