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Foreign Competition along the Quality Ladder

Author

Listed:
  • Paul Piveteau
  • Gabriel Smagghue

Abstract

We document that firms with low prices are more impacted by low-cost competition. To explain this pattern, we propose an empirical model of trade with random-coefficients demand and endogenous product quality. Unlike commonly used demand systems (e.g. CES, nested logit), this model generates rich substitution patterns and implies an “escape-competition" effect: in response to low-cost competition, firms have an incentive to upgrade their product quality. The estimation of the model reveals significant heterogeneity in consumer preferences. Counterfactual experiments suggest that the €œChina shock € was significantly more damaging to firms at the bottom of the price distribution, and that quality upgrading had a limited role at mitigating the shock.

Suggested Citation

  • Paul Piveteau & Gabriel Smagghue, 2024. "Foreign Competition along the Quality Ladder," Working papers 979, Banque de France.
    • Handle: RePEc:bfr:banfra:979
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    File URL: https://www.banque-france.fr/system/files/2024-12/WP979.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Low-Cost Competition; Mixed Preferences; Quality Upgrading;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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