Quality, Variable Markups, and Welfare: A Quantitative General Equilibrium Analysis of Export Prices

Modern trade models attribute the dispersion of prices across countries to physical and man-made barriers to trade, to the pricing-to-market by heterogeneous producers, and to differences in the quality of output offered by firms. This paper analyzes a quantitative general equilibrium model that incorporates all three of these mechanisms. Estimating the model parameters from Chinese firm-level trade data, we find that our model that incorporates per unit trade costs imply lower gains from trade relative to standard models because these costs are a greater burden to the most productive firms. We also show that changes in specific trade costs induce larger shifts in import prices than do changes in ad valorem trade costs that equivalently restrict trade. The results highlight the importance of modelling "Washington Apples" effects in quantitative trade models.