NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

International Prices and Endogenous Quality

Robert C. Feenstra, John Romalis

NBER Working Paper No. 18314
Issued in August 2012
NBER Program(s):International Trade and Investment

The unit values of internationally traded goods are heavily influenced by quality. We model this in an extended monopolistic competition framework where, in addition to choosing price, firms simultaneously choose quality. We allow countries to have non-homothetic demand for quality. The optimal choice of quality by firms reflects this non-homothetic demand as well as the costs of production, including specific transport costs, under the "Washington apples" effect. We estimate the implied gravity equation using detailed bilateral trade data for about 200 countries over 1984-2008. Our system identifies quality and quality-adjusted prices, from which we will construct price indexes for imports and exports for each country that will be incorporated into the next generation of the Penn World Table.

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Document Object Identifier (DOI): 10.3386/w18314

Published: Article: Robert C. Feenstra and John Romalis International Prices and Endogenous Quality* The Quarterly Journal of Economics first published online February 5, 2014 doi:10.1093/qje/qju001 citation courtesy of

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