Price and Quality Dispersion in an Offshoring Market: Evidence from Semiconductor Production Services

64 Pages Posted: 23 Nov 2013 Last revised: 7 Oct 2014

See all articles by David M. Byrne

David M. Byrne

Board of Governors of the Federal Reserve System

Brian Kovak

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management

Ryan Michaels

University of Rochester - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November 2013

Abstract

This paper studies price and quality differences across international intermediate input suppliers. We develop price measures that account for (i) differences in product characteristics, (ii) unobserved quality differences, and (iii) pure (frictional) price dispersion across suppliers. Using uniquely detailed transaction- level data from the semiconductor industry, we document large average price differences across suppliers for observationally identical products, and find that price differentials close over the product life cycle. We interpret this finding in a model where buyers face costs of switching suppliers. The theory demonstrates how to use the observed price dynamics to adjust prices for unobserved quality differences across suppliers. The results of this analysis reveal that pure price dispersion and unobserved quality differences are both important in this market. These two features make it difficult to construct constant-quality import price indexes, which generally assume away pure price dispersion. We document the resulting upward bias in standard price indexes, develop a quality-adjusted index for semiconductor fabrication, and propose a general method for bounding the true constant-quality price index.

Suggested Citation

Byrne, David M. and Kovak, Brian and Michaels, Ryan, Price and Quality Dispersion in an Offshoring Market: Evidence from Semiconductor Production Services (November 2013). NBER Working Paper No. w19637. Available at SSRN: https://ssrn.com/abstract=2358748

David M. Byrne (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Brian Kovak

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management ( email )

Pittsburgh, PA 15213-3890
United States

Ryan Michaels

University of Rochester - Department of Economics ( email )

Harkness Hall
Rochester, NY 14627
United States

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