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International Prices and Endogenous Quality

Listed author(s):
  • Robert C. Feenstra
  • John Romalis

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. We allow countries to have non-homothetic demand for quality. The optimal choice of quality by firms reflects this non-homothetic demand as well as the costs of production, including specific transport costs, under the "Washington apples" effect. We estimate the implied gravity equation using detailed bilateral trade data for about 200 countries over 1984-2008. Our system identifies quality and quality-adjusted prices, from which we will construct price indexes for imports and exports for each country that will be incorporated into the next generation of the Penn World Table.

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File URL: http://www.nber.org/papers/w18314.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18314.

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Date of creation: Aug 2012
Publication status: published as Article: Robert C. Feenstra and John Romalis International Prices and Endogenous Quality* The Quarterly Journal of Economics first published online February 5, 2014 doi:10.1093/qje/qju001
Handle: RePEc:nbr:nberwo:18314
Note: ITI
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  1. Fajgelbaum, Pablo & Grossman, Gene M. & Helpman, Elhanan, 2011. "Income distribution, product quality, and international trade," Policy Research Working Paper Series 5843, The World Bank.
  2. Jonathan Eaton & Samuel S. Kortum & Sebastian Sotelo, 2012. "International Trade: Linking Micro and Macro," NBER Working Papers 17864, National Bureau of Economic Research, Inc.
  3. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2008. "An Anatomy of International Trade: Evidence from French Firms," NBER Working Papers 14610, National Bureau of Economic Research, Inc.
  4. Christian Broda & David E. Weinstein, 2004. "Globalization and the gains from variety," Staff Reports 180, Federal Reserve Bank of New York.
  5. Bilbiie, Florin Ovidiu & Ghironi, Fabio & Melitz, Marc J, 2011. "Endogenous Entry, Product Variety, and Business Cycles," CEPR Discussion Papers 8564, C.E.P.R. Discussion Papers.
  6. Eddy Bekkers & Joseph Francois & Miriam Manchin, 2012. "Import Prices, Income and Inequality," Economics working papers 2012-03, Department of Economics, Johannes Kepler University Linz, Austria.
  7. Stephen Redding & Anthony J. Venables, 2001. "Economic Geography and International Inequality," CEP Discussion Papers dp0495, Centre for Economic Performance, LSE.
  8. Ina Simonovska, 2011. "Income Differences and Prices of Tradables," Working Papers 1015, University of California, Davis, Department of Economics.
  9. Eric A. Verhoogen, 2008. "Trade, Quality Upgrading, and Wage Inequality in the Mexican Manufacturing Sector," The Quarterly Journal of Economics, Oxford University Press, vol. 123(2), pages 489-530.
  10. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
  11. Ina Simonovska & Michael Waugh, 2011. "The Elasticity of Trade: Estimates and Evidence," Working Papers 112, University of California, Davis, Department of Economics.
  12. Richard E. Baldwin & Tadashi Ito, 2008. "Quality competition versus price competition goods: An empirical classification," NBER Working Papers 14305, National Bureau of Economic Research, Inc.
  13. Matthieu Crozet & Keith Head & Thierry Mayer, 2012. "Quality sorting and trade: Firm-level evidence for French wine," PSE - Labex "OSE-Ouvrir la Science Economique" hal-00610947, HAL.
  14. Irving B. Kravis & Robert E. Lipsey, 1975. "International Trade Prices and Price Proxies," NBER Chapters, in: The Role of the Computer in Economic and Social Research in Latin America, pages 253-268 National Bureau of Economic Research, Inc.
  15. Richard Baldwin & James Harrigan, 2007. "Zeros, Quality and Space: Trade Theory and Trade Evidence," NBER Working Papers 13214, National Bureau of Economic Research, Inc.
  16. Angus Deaton & Alan Heston, 2009. "Understanding PPPs and PPP-based national accounts," Working Papers 1186, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
  17. Costas Arkolakis, 2008. "Market Penetration Costs and the New Consumers Margin in International Trade," NBER Working Papers 14214, National Bureau of Economic Research, Inc.
  18. Diewert, W Erwin, 1978. "Superlative Index Numbers and Consistency in Aggregation," Econometrica, Econometric Society, vol. 46(4), pages 883-900, July.
  19. Mary Amiti & Amit K. Khandelwal, 2009. "Import Competition and Quality Upgrading," NBER Working Papers 15503, National Bureau of Economic Research, Inc.
  20. Benjamin R. Mandel, 2010. "Heterogeneous firms and import quality: evidence from transaction-level prices," International Finance Discussion Papers 991, Board of Governors of the Federal Reserve System (U.S.).
  21. Robert C. Feenstra & John Romalis & Peter K. Schott, 2002. "U.S. Imports, Exports, and Tariff Data, 1989-2001," NBER Working Papers 9387, National Bureau of Economic Research, Inc.
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