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Estimating Product Quality in International Trade

  • Borin, Alessandro
  • Lamieri, Marco
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    In recent years empirical studies offer clear evidence on the increasing importance of intra-industry trade in presence of vertically differentiated products. These are goods that, within the same industry, are distinguished by different quality levels. In the new trade theory and in the neoclassical literature there is not a well-established methodology to estimate good's quality in international trade; this contribution presents different methodologies starting from a review of the literature and proposing alternative solutions. In the first part of the paper classical indicators of intra-industry trade are presented as well as original measures, in the vein of Aw and Roberts, starting observing the evolution of export to identify the qualitative changes in absolute terms and relative to competitors. These indicators can be influenced not only by quality shifts but also by other cyclical and structural factors. To overcome these limitations and give a better interpretation of the underlying phenomenon we present a micro-founded model that attempts to evaluate the effect of quality on export demand. This model is based on the underlying relation between vertical product differentiation, goods substitution effect and market power of exporting firms. In the last part an econometric methodology is presented to estimate price elasticity of volume market share as function of the difference in price against competitors in an inter-temporal framework. The policy implications of this research moves from a better assessment of countries international market positioning and price setting strategy to the identifications of competitive dynamics based on quality rather than on prices.

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    File URL: http://mpra.ub.uni-muenchen.de/14678/1/MPRA_paper_14678.pdf
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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14678.

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    Date of creation: 01 Sep 2007
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    Handle: RePEc:pra:mprapa:14678
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    1. Davis, Donald R. & Weinstein, David E., 2003. "Market access, economic geography and comparative advantage: an empirical test," Journal of International Economics, Elsevier, vol. 59(1), pages 1-23, January.
    2. Roberto Basile & Sergio de Nardis & Alessandro Girardi, 2006. "Pricing to market of Italian exporting firms," ISAE Working Papers 70, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).
    3. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    4. Lionel Fontagné & Guillaume Gaulier & Soledad Zignago, 2007. "Specialisation across Varieties within Products and North-South Competition," Working Papers 2007-06, CEPII research center.
    5. Bresnahan, Timothy F., 1989. "Empirical studies of industries with market power," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 17, pages 1011-1057 Elsevier.
    6. Goldberg, Pinelopi Koujianou & Knetter, Michael M., 1999. "Measuring the intensity of competition in export markets," Journal of International Economics, Elsevier, vol. 47(1), pages 27-60, February.
    7. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2000. "Plants and Productivity in International Trade," Boston University - Institute for Economic Development 105, Boston University, Institute for Economic Development.
    8. Richard Baldwin & James Harrigan, 2007. "Zeros, Quality and Space: Trade Theory and Trade Evidence," NBER Working Papers 13214, National Bureau of Economic Research, Inc.
    9. Juan Carlos Hallak & Peter K. Schott, 2008. "Estimating Cross-Country Differences in Product Quality," NBER Working Papers 13807, National Bureau of Economic Research, Inc.
    10. Stefano Chiarlone, 2000. "Trade of quality differentiated goods and import elasticities," KITeS Working Papers 112, KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy, revised Jul 2000.
    11. Andrew B. Bernard & J. Bradford Jensen, 2001. "Who Dies? International Trade, Market Structure, and Industrial Restructuring," NBER Working Papers 8327, National Bureau of Economic Research, Inc.
    12. Bugamelli Matteo & Tedeschi Roberto, 2007. "Exporters' Pricing Strategies: the Case of Italy," Politica economica - Journal of Economic Policy (PEJEP), Società editrice il Mulino, issue 3, pages 321.
    13. Sergio de Nardis & Cristina Pensa, 2004. "How intense is Competition in International Markets of Traditional goods?," ISAE Working Papers 45, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).
    14. Stiglitz, Joseph E, 1987. "The Causes and Consequences of the Dependence of Quality on Price," Journal of Economic Literature, American Economic Association, vol. 25(1), pages 1-48, March.
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