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Price and Quality Dispersion in an Offshoring Market: Evidence from Semiconductor Production Services

David Byrne, Brian K. Kovak and Ryan Michaels

No 19637, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies price and quality differences across international intermediate input suppliers. We develop price measures that account for (i) differences in product characteristics, (ii) unobserved quality differences, and (iii) pure (frictional) price dispersion across suppliers. Using uniquely detailed transaction- level data from the semiconductor industry, we document large average price differences across suppliers for observationally identical products, and find that price differentials close over the product life cycle. We interpret this finding in a model where buyers face costs of switching suppliers. The theory demonstrates how to use the observed price dynamics to adjust prices for unobserved quality differences across suppliers. The results of this analysis reveal that pure price dispersion and unobserved quality differences are both important in this market. These two features make it difficult to construct constant-quality import price indexes, which generally assume away pure price dispersion. We document the resulting upward bias in standard price indexes, develop a quality-adjusted index for semiconductor fabrication, and propose a general method for bounding the true constant-quality price index.

JEL-codes: D43 F61 L63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-ind and nep-int
Date: 2013-11
Note: ITI PR
References: View references in EconPapers View complete reference list from CitEc
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