Quality, Distance and Trade: A Strategic Approach

Abstract

This paper contributes to the literature on distance and quality by identifying a force contributing to explain the observed increase of the quality of shipped goods with the distance of their destination market. This force originates from the influence of distance on firms' strategic behavior when the quality level of goods is a choice variable for them, and complements the ones already proposed in the literature. Our approach differs from the extant literature because it does not rely on technology or preference/income differentials to identify the determinants and drivers of trade flows. Moreover, it allows to clearly disentangle between the price setting and quality choice of firms. We find that distance has an unambiguously positive effect on the average quality of traded goods. Our results suit the empirical evidence on distance and quality and contribute to the analysis of the determinants of firms' trade performance.

Measuring the impact of legal and administrative international barriers on regional growth

“…This paved the way for studies estimating the advantages of tariffs' removal (equated to border removal), quantifying the decrease of trade in presence of a border and the consequently missed economic growth. In the EU case, the gravity model was applied at country level including tariff and non‐tariff levels among pairs of countries (Dunne, ; European Parliament, ), as well as at regional level (Bacchiega, Minniti, & Palestini, ).…”

Sourcing product quality for foreign market entry

“…In the second stage, if firm h prefers to manufacture low quality by relying on inputs produced by the perfectly competitive upstream industry, then c h = c f = 0; u h = u f = u, where u represents the product quality level when low-quality inputs are used in production. 15 Substituting these into equations ( 1) and ( 2), the price of firm h's variety, its sales and profits from manufacturing low quality in F in equilibrium can be expressed as:…”

“…Most studies in the related literature rely on nonhomothetic demands, or heterogeneity in consumer preferences/tastes (so as to capture vertically differentiated traded products), 3 Vertical differentiation can be traced back to Linder (1961) and Alchian and Allen (1964). For the related trade literature on vertical product differentiation see, among others, Falvey and Kierzkowski (1987), Flam and Helpman (1987), Motta et al (1997), Toshimutsu (2005), Iacovone and Javorcik (2010), Anderson and Schmitt (2010), Verhoogen (2008), Johnson (2012), Bastos and Silva (2010), Baldwin and Harrigan (2011), Fajgelbaum et al (2011), Kugler and Verhoogen (2012), Crozet et al (2012), Manova and Zhang (2012), Amiti and Khandelwal (2013), Antoniades (2015), Feenstra and Romalis (2014), Bacchiega et al (2016), Manova and Yu (2017).…”