Foreign Competition along the Quality Ladder

Paul Piveteau and Gabriel Smagghue

Working papers from Banque de France

Abstract: We document that firms with low prices are more impacted by low-cost competition. To explain this pattern, we propose an empirical model of trade with random-coefficients demand and endogenous product quality. Unlike commonly used demand systems (e.g. CES, nested logit), this model generates rich substitution patterns and implies an “escape-competition" effect: in response to low-cost competition, firms have an incentive to upgrade their product quality. The estimation of the model reveals significant heterogeneity in consumer preferences. Counterfactual experiments suggest that the €œChina shock € was significantly more damaging to firms at the bottom of the price distribution, and that quality upgrading had a limited role at mitigating the shock.

Keywords: Low-Cost Competition; Mixed Preferences; Quality Upgrading (search for similar items in EconPapers)
JEL-codes: D83 E52 E58 (search for similar items in EconPapers)
Pages: 87 pages
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:979

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