Price, Product Quality, and Exporter Dynamics: Evidence From China

Abstract

This article develops a model of heterogeneous firms that endogenously choose prices and product quality to build demand in export markets. New exporters optimally charge relatively low prices and produce low‐quality goods upon entry. Product quality, prices, and sales increase as demand grows. We structurally estimate model parameters using Chinese customs data. The estimated incentive to build future demand reduces average export prices by 0.7% and increases export sales by 4% upon entry. Endogenous demand accumulation causes estimated export prices, product quality, and sales to grow by 2.2%, 12%, and 79%, respectively, over the following five years.

How exporting firms respond to technical barriers to trade?

“…Kugler and Verhoogen (), Hallak and Sividasan (), Fan et al. () and Rodrigue and Tan () confirmed the quality connection between intermediate inputs and final products.…”

“…To alleviate the concern that the estimated coefficient on export quality was biased, we examined whether firms that exported lighters to the EU market tended to import higher quality materials after the implementation of the CR decision, since a higher quality of inputs are typically related to a higher quality of final products (Fan et al., ; Hallak & Sividasan, ; Kugler & Verhoogen, ; Rodrigue & Tan, ). Here, we checked the probability that a firm imported intermediate inputs which could produce a higher quality of final products instead of estimating the quality of imported products .…”

“…Specifically, we compared the intermediates that firms imported before and after the CR decision and identified the quality changes in intermediate inputs (e.g., cigarette lighters made by galvanising metal shell are better than those made with plastic shells). Since the quality of intermediate inputs is closely related to the quality of the final outputs (Fan, Li, & Yeaple, ; Hallak & Sividasan, ; Kugler & Verhoogen, ; Rodrigue & Tan, ), we can uncover the impact of the CR decision on firm‐level export quality through observing its impact on firm‐level import quality. Furthermore, examining firm‐level imported materials allows us to assess the influence of the CR decision on the “extensive margin” of quality upgrading .…”

Export rivalry and exchange rate pass‐through

“…3 Piveteau (2016) and Rodrigue and Tan (2019) both document that in order to build brand reputation (demand stock), firms have a strong incentive to lower their current price to increase sales, which will grow their reputation (future demand stock). 4 Tan (2019) develops a model to capture the cross-market demand spillovers, in which conditioning on other firms' strategy, a firm that enters more markets (more sales) will have higher sales in a new market.…”

“… Piveteau () and Rodrigue and Tan () both document that in order to build brand reputation (demand stock), firms have a strong incentive to lower their current price to increase sales, which will grow their reputation (future demand stock). …”