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Multi-Product Firms and Product Quality

Kalina Manova and Zhihong Yu

No 11861, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We examine the global operations of multi-product firms. We present a flexible heterogeneous-firm trade model with either limited or strong scope for quality differentiation. Using customs data for China during 2002-2006, we empirically establish that firms allocate activity across products in line with a product hierarchy based on quality. Firms vary output quality across their products by using inputs of different quality levels. Their core competence is in varieties of superior quality that command higher prices but nevertheless generate higher sales. In markets where they offer fewer products, firms concentrate on their core varieties by dropping low-quality peripheral goods on the extensive margin and by shifting sales towards top-quality products on the intensive margin. The product quality ladder also governs firms' export dynamics, both in general and in response to the exogenous removal of MFA quotas on textiles and apparel. Our results inform the drivers and measurement of firm performance, the effects of trade reforms, and the design of development policies.

Keywords: export prices; multi-product firms; product quality; Trade; trade reforms (search for similar items in EconPapers)
JEL-codes: D22 F10 F12 F14 L10 L11 L15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-com, nep-ind, nep-int and nep-mkt
Date: 2017-02
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Working Paper: Multi-product firms and product quality (2017) Downloads
Working Paper: Multi-Product Firms and Product Quality (2012) Downloads
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