International Prices and Endogenous Quality

64 Pages Posted: 18 Aug 2012 Last revised: 11 Nov 2013

See all articles by Robert C. Feenstra

Robert C. Feenstra

University of California, Davis - Department of Economics; National Bureau of Economic Research (NBER)

John Romalis

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Date Written: August 2012

Abstract

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.

Suggested Citation

Feenstra, Robert C. and Romalis, John, International Prices and Endogenous Quality (August 2012). NBER Working Paper No. w18314, Available at SSRN: https://ssrn.com/abstract=2131685

Robert C. Feenstra (Contact Author)

University of California, Davis - Department of Economics ( email )

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John Romalis

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER)

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United States

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