International Prices and Endogenous Quality *

Abstract

The unit values of internationally traded goods are heavily influenced by quality. We model this in an extended monopolistic competition framework where, in addition to choosing price, firms simultaneously choose quality subject to nonhomothetic demand. We estimate quality and quality-adjusted price indexes for 185 countries over 1984–2011. Our estimates are less sensitive to assumptions about the extensive margin of firms than are purely “demand-side” estimates. We find that quality-adjusted prices vary much less across countries than do unit values and, surprisingly, the quality-adjusted terms of trade are negatively related to countries’ level of income.

International commodity trade, transport costs, and product differentiation

“…[22,3,15]). In addition, the connection between product quality and trade has been modeled [16,8,19]. This literature generally confirms the Alchian-Allen theorem which states that, in an international trade context, importers' purchases will switch toward relatively higher quality products, in response to a rise in transportation costs.…”

Eco-Labeling and Retailer Pricing Strategies: The U.K. Haddock Market

“…Fresh haddock of a high quality will generally be more expensive than frozen haddock. In other retailers, frozen fillets were commonly thawed, packed, and sold as chilled products (In the more general literature, there is a well-documented relationship between price and quality [53]). An additional contributing factor may of course be that the smaller volumes purchased by the high-end retailers preclude price parity with the buying power of their larger rivals, but unfortunately these data are not available.…”

Unit Values in International Trade and Product Quality

“…So after controlling for other country specific factors which might affect unit values, about 80 percent of the observed variations in export unit values can be attributed to quality, whereas the pure distance effect is much weaker. The predominance of quality to unit values is also found by Feenstra and Romalis (2014), where more distant exporters will choose to sell products with higher unit values,. Standard errors in parentheses * significant at 5%; ** significant at 1%…”