Lower prices or higher quality? Firms’ response to increased competition following trade liberalization

Maria Bas () and Vanessa Strauss-Kahn ()
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Maria Bas: University of Paris 1 and CES
Vanessa Strauss-Kahn: ESCP Business School

Review of World Economics (Weltwirtschaftliches Archiv), 2024, vol. 160, issue 2, No 1, 279-309

Abstract: Abstract This paper investigates the impact of increased competition at the product-market level on firms’ strategic price decisions. We analyse this issue in a context of trade liberalization where only some firms benefit from the input tariff cuts. We focus on China which is characterized by a unique dual trade regime, where some imports of intermediate goods are subject to tariff (i.e., the ordinary status) whereas other (i.e., the processing status) have been exempted of tariffs for the last 30 years. The recent Chinese trade liberalization allowed ordinary importers to improve their competitiveness relative to processing firms. Facing stronger pressures in their export markets, processing firms must adjust their strategy. We find that ordinary firms took advantage of the Chinese’ input trade liberalization to improve the quality of their exported products and processing firms respond to this quality sorting by decreasing their export prices and markups. This finding is more pronounced for lower-end product sold in in advanced economies, where the quality sorting of competitors is more relevant.

Keywords: Trade liberalization; Competition; Export prices; Imported inputs; Firm-level data (search for similar items in EconPapers)
JEL-codes: F10 F12 F13 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10290-023-00503-7

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