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Trading Tasks and Quality

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  • F. Banu Demir

Abstract

I present a trade model featuring North-South differences in demand for quality and in quality of task supply. The model explains a number of stylised facts: Southern firms charge higher factory-gate prices for their products in rich than in poor, and in distant than in near markets. The model predicts that firms vary the quality of their products across markets by changing, between varieties, the fractions of low and high-quality tasks. This mechanism for quality differentiation introduces a new margin to trade: the extensive margin of intermediate imports. Extension of the model to general equilibrium with heterogeneous firms shows that even under low fixed and zero variable trade costs, only the more productive Southern firms export to the rich Northern market. Compared to their domestic market, they charge higher prices in the North, with the most productive ones earning higher revenues.

Suggested Citation

  • F. Banu Demir, 2011. "Trading Tasks and Quality," Economics Series Working Papers 582, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:582
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    File URL: http://www.economics.ox.ac.uk/materials/working_papers/paper582.pdf
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    References listed on IDEAS

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    1. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," American Economic Review, American Economic Association, vol. 98(4), pages 1707-1721, September.
    2. Pinelopi Koujianou Goldberg & Amit Kumar Khandelwal & Nina Pavcnik & Petia Topalova, 2010. "Imported Intermediate Inputs and Domestic Product Growth: Evidence from India," The Quarterly Journal of Economics, Oxford University Press, vol. 125(4), pages 1727-1767.
    3. Eckel, Carsten & Iacovone, Leonardo & Javorcik, Beata & Neary, J. Peter, 2015. "Multi-product firms at home and away: Cost- versus quality-based competence," Journal of International Economics, Elsevier, vol. 95(2), pages 216-232.
    4. Carsten Eckel & J. Peter Neary, 2010. "Multi-Product Firms and Flexible Manufacturing in the Global Economy," Review of Economic Studies, Oxford University Press, vol. 77(1), pages 188-217.
    5. David Hummels & Alexandre Skiba, 2004. "Shipping the Good Apples Out? An Empirical Confirmation of the Alchian-Allen Conjecture," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1384-1402, December.
    6. Hallak, Juan Carlos, 2006. "Product quality and the direction of trade," Journal of International Economics, Elsevier, vol. 68(1), pages 238-265, January.
    7. Matthieu Crozet & Keith Head & Thierry Mayer, 2012. "Quality Sorting and Trade: Firm-level Evidence for French Wine," Review of Economic Studies, Oxford University Press, vol. 79(2), pages 609-644.
    8. Holger Gorg & Laszlo Halpern & Balazs Murakozy, 2010. "Why Do Within Firm-Product Export Prices Differ across Markets?," IEHAS Discussion Papers 1003, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
    9. Pinelopi Goldberg & Amit Khandelwal & Nina Pavcnik & Petia Topalova, 2009. "Trade Liberalization and New Imported Inputs," American Economic Review, American Economic Association, vol. 99(2), pages 494-500, May.
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    Citations

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    Cited by:

    1. Eckel, Carsten & Iacovone, Leonardo & Javorcik, Beata & Neary, J. Peter, 2015. "Multi-product firms at home and away: Cost- versus quality-based competence," Journal of International Economics, Elsevier, vol. 95(2), pages 216-232.
    2. Bas, Maria & Strauss-Kahn, Vanessa, 2015. "Input-trade liberalization, export prices and quality upgrading," Journal of International Economics, Elsevier, vol. 95(2), pages 250-262.
    3. Berlingieri, Giuseppe & Breinlich, Holger & Dhingra, Swati, 2016. "The Impact of Trade Agreements on Consumer Welfare," CEPR Discussion Papers 11148, C.E.P.R. Discussion Papers.
    4. Adriana Peluffo & Juan Ignacio Scasso, 2016. "Destination and source countries: Do they have a role on product quality?," Documentos de Trabajo (working papers) 16-10, Instituto de Economía - IECON.

    More about this item

    Keywords

    Quality; Task trade; Heterogeneous firms;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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