Working Paper: NBER ID: w19637
Authors: David Byrne; Brian K. Kovak; Ryan Michaels
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.
Keywords: Price Dispersion; Quality Differences; Offshoring; Semiconductor Industry
JEL Codes: D43; F61; L63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| supplier entry and switching costs (L11) | influence price differences (P22) |
| unobserved quality differences and pure price dispersion (L15) | complicate construction of constant-quality import price indexes (C43) |
| traditional methods (C90) | omit price declines due to supplier entry (D43) |
| price differences (P22) | decrease over the product life cycle (L15) |
| price differentials among suppliers of semiconductor production services (L11) | significant price differences (P22) |
| wafers produced in China (L61) | cost less than those from Taiwan (F14) |