Estimating Product Quality in International Trade

Abstract

In recent years empirical studies offer clear evidence on the increasing importance of intra-industry trade in presence of vertically differentiated products. These are goods that, within the same industry, are distinguished by different quality levels. In the new trade theory and in the neoclassical literature there is not a well-established methodology to estimate good's quality in international trade; this contribution presents different methodologies starting from a review of the literature and proposing alternative solutions. In the first part of the paper classical indicators of intra-industry trade are presented as well as original measures, in the vein of Aw and Roberts, starting observing the evolution of export to identify the qualitative changes in absolute terms and relative to competitors. These indicators can be influenced not only by quality shifts but also by other cyclical and structural factors. To overcome these limitations and give a better interpretation of the underlying phenomenon we present a micro-founded model that attempts to evaluate the effect of quality on export demand. This model is based on the underlying relation between vertical product differentiation, goods substitution effect and market power of exporting firms. In the last part an econometric methodology is presented to estimate price elasticity of volume market share as function of the difference in price against competitors in an inter-temporal framework. The policy implications of this research moves from a better assessment of countries international market positioning and price setting strategy to the identifications of competitive dynamics based on quality rather than on prices.product quality, intra-industry trade, vertical differentiation, international trade, price elasticity