Heterogeneous Quality Firms and Trade Costs

There is increasing empirical evidence that vertical product differentiation is an important determinant of international trade. However, the economic literature so far has solely focused on the case in which quality trade stems from differences between countries. No studies investigate the role of quality trade between similar economies. This paper first develops a simple theoretical trade model that includes vertical product differentiation in a heterogeneous-firm framework. The model yields three main predictions for trade between similar economies. First, exported goods are of higher quality than goods sold on the domestic market. Second, larger economies have on average higher export qualities compared with smaller economies. Third, with increasing trade costs higher quality goods are exchanged. For all three effects, strong empirical support is found using detailed export trade data of the United States and 15 European Union countries.

Bibliographic Details

Main Authors:	Helble, Matthias, Okubo, Toshihiro
Format:	Policy Research Working Paper biblioteca
Language:	English
Published:	World Bank, Washington, DC 2008-03
Subjects:	ADVERTISING, AGGREGATE DEMAND, AIM, AIRCRAFT, AVERAGE PRICE, AVERAGE PRICES, BILATERAL TRADE, BRANDS, CAPITAL STOCK, CFS, CLOSED ECONOMY, COMMERCIAL POLICY, COMMODITY, COMMON MARKET, COMPARATIVE ADVANTAGE, COMPETITION EFFECT, COMPETITIVENESS, CONSTANT ELASTICITY OF SUBSTITUTION, CONSTANT RETURNS TO SCALE, CONSUMER PRICES, CONSUMERS, CURRENCY, DEMAND FUNCTION, DEVELOPMENT ECONOMICS, DOMESTIC MARKET, DOMESTIC PRODUCTION, ECONOMIC GEOGRAPHY, ECONOMIC SIZE, ECONOMIC THEORY, ELASTICITY, ELASTICITY OF SUBSTITUTION, EXOGENOUS VARIABLES, EXPENDITURE, EXPORT MARKET, EXPORT MARKETS, EXPORT PERFORMANCE, EXPORT PRICE, EXPORT PRICES, EXPORT TRADE, EXPORTERS, EXPORTS, FACTOR ENDOWMENTS, FACTOR PRICE, FACTOR PRICES, FIXED COSTS, FOREIGN DIRECT INVESTMENT, FOREIGN MARKET, FOREIGN PRODUCERS, FOREIGN SALES, FREE TRADE, FREIGHT, FREIGHT COSTS, FREIGHT RATES, FUTURE RESEARCH, FUTURE STUDIES, GDP, GRAVITY EQUATION, GRAVITY MODEL, HARMONIZED SYSTEM, HOME MARKET, HUMAN CAPITAL, IMPACT OF TRADE, IMPORT PENETRATION, INCOME EFFECT, INCOME LEVELS, INCREASING RETURNS, INDUSTRIAL ECONOMICS, INDUSTRY TRADE, INTERNATIONAL MARKETS, INTERNATIONAL TRADE, LABOR MARKET, MANUFACTURING, MARGINAL COSTS, MARKET ACCESS, MARKET COMPETITION, MARKET SHARE, MARKET SIZE, MARKET SIZE EFFECTS, MEASURE OF TRADE, MONOPOLISTIC COMPETITION, NATIONAL INCOME, NET EXPORTER, NOMINAL PRICE, PATTERN OF TRADE, PATTERNS OF TRADE, PER CAPITA INCOME, PERFECT COMPETITION, POLITICAL ECONOMY, PRICE COMPETITION, PRICE DISCRIMINATION, PRICE MECHANISM, PRODUCT DIFFERENTIATION, PRODUCT QUALITY, PRODUCTIVITY, PROFIT FUNCTIONS, SALES, SHIPMENTS, SHIPPING, SHIPPING COSTS, SOUTH AMERICAN, SPECIALIZATION, SUPPLIERS, TARIFF DATA, TECHNOLOGY TRANSFER, TELECOMMUNICATIONS, TERMS OF TRADE, TOTAL COSTS, TRADE COSTS, TRADE DATA, TRADE FACILITATION, TRADE FLOWS, TRADE LIBERALIZATION, TRADE MODELS, TRADE MORE, TRADE PARTNERS, TRADE PATTERN, TRADE PATTERNS, TRANSPORT COSTS, TURNOVER, UNEMPLOYMENT, UNIT OF CAPITAL, UNSKILLED LABOR, UTILITY FUNCTION, VALUE OF EXPORTS, VALUE OF TRADE, VARIABLE COSTS, WAGES,
Online Access:	http://documents.worldbank.org/curated/en/2008/03/9069456/heterogeneous-quality-firms-trade-costs http://hdl.handle.net/10986/6558
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