Multi-Product Firms and Product Quality
Department of Economics, University of Oxford; Stanford University - Department of Economics; NBER
Nomura Holdings, Inc. (NHI) - Nomura Securities Co., Ltd.; International Monetary Fund (on leave)
This paper proposes that quality differentiation is an important feature of the operations of multi-product firms. We develop a model in which manufacturers vary product quality across their product range by using inputs of different quality levels. Firms' core competency is in varieties of superior quality that generate higher sales despite being more expensive. Using detailed customs data for China, we establish four new stylized facts consistent with this model. First, firms earn more bilateral and global revenues from their more expensive products. Second, exporters focus on their top expensive goods, drop cheaper articles and earn lower revenues in markets where they sell fewer varieties. Third, companies' sales are more skewed towards their core expensive goods in destinations where they offer less items. Finally, export prices are positively correlated with input prices across products within a firm. Our results have important implications for the aggregate and distributional effects of trade reforms and exchange rate movements.
Number of Pages in PDF File: 37
Keywords: Heterogeneous firms, multi-product firms, product quality, export prices
JEL Classification: D22, F10, F12, F14, L10, L11, L15
Date posted: December 13, 2012