Working Paper: NBER ID: w25611
Authors: Haichao Fan; Yao Amber Li; Sichuang Xu; Stephen R. Yeaple
Abstract: Modern trade models attribute the dispersion of international prices to physical and man-made barriers to trade, to the pricing-to-market by heterogeneous producers and to differences in the quality of output offered by firms. This paper presents a tractable general equilibrium model that incorporates all three of these mechanisms. Our model allows us to confront Chinese firm-level data on the prices charged and revenues earned within and across markets. We show that all three mechanisms are necessary to fit the distribution of prices and revenues across firms and markets. Accounting for endogenous quality heterogeneity across firms and markets is shown to be critical for the response of prices to trade and tariff shocks.
Keywords: Quality Variable Markups; Export Price; Washington Apples Effect; Specific Trade Costs
JEL Codes: F12; F14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade costs (F19) | dispersion of international prices (F16) |
| pricing-to-market (L11) | dispersion of international prices (F16) |
| quality differences (L15) | dispersion of international prices (F16) |
| endogenous quality heterogeneity (L15) | prices response to trade and tariff shocks (F14) |
| higher specific trade costs (F12) | firms upgrade their quality (L15) |
| firms upgrade their quality (L15) | exaggerated price increases (E31) |
| ad valorem trade costs (F14) | firms lower quality (L15) |
| firms lower quality (L15) | smaller price changes (E30) |
| more productive firms (D21) | higher prices (D49) |
| quality influences pricing decisions (L15) | correlation between prices and revenues (E30) |