Essays on product quality differentiation and international trade

Abstract

Essay one examines whether a generalized version of Flam and Helpman\u27s (1987) model of vertical differentiation can reconcile three facts. One, countries import only a subset of available varieties. Two, import prices vary across exporters within narrow product categories. Three, US growth in both import variety and import price dispersion has occurred at the same time that the US income distribution has significantly widened. The generalized model maps cross-country differences in income distributions to variation in import variety and price variation. The theoretical predictions are examined and confirmed using panel data on import variety and prices, and detailed income distribution data from the Luxembourg Income Survey. Country pairs whose income distributions are growing more similar over time have growing similarity in the distribution of their import prices, and in the number of common export sources from which they buy. Essay two investigates the theoretical relationship between factor abundance and within-product specialization. To address the issue, we develop a general equilibrium model that shows the relationship between quality/quantity specialization and factor endowments. On the quality demand side, we employ a modified CES utility function to explicitly take into account the consumer\u27s preferences for quality. Quality supply side is modeled by introducing a quality differentiated intermediate goods. The model can perfectly explain the couple of recent important empirical findings (Schott 2004, Hummels and Klenow 2005). One, within-product qualities are positively correlated with capital abundance. Two, capital- (labor-) abundant countries produce higher (lower) qualities in smaller (larger) quantities within a product