Multi-Product Firms and Product Quality

Posted by D. Daniel Sokol

Kalina Manova (Stanford University – Department of Economics; NBER) and Zhiwei Zhang (Nomura Holdings, Inc. – Nomura Securities Co., Ltd.; International Monetary Fund) address Multi-Product Firms and Product Quality

ABSTRACT: This paper proposes that quality differentiation is an important feature of the operations of multi-product firms. We develop a model in which manufacturers vary product quality across their product range by using inputs of different quality levels. Firms’ core competency is in varieties of superior quality that generate higher sales despite being more expensive. Using detailed customs data for China, we establish four new stylized facts consistent with this model. First, firms earn more bilateral and global revenues from their more expensive products. Second, exporters focus on their top expensive goods, drop cheaper articles and earn lower revenues in markets where they sell fewer varieties. Third, companies’ sales are more skewed towards their core expensive goods in destinations where they offer less items. Finally, export prices are positively correlated with input prices across products within a firm. Our results have important implications for the aggregate and distributional effects of trade reforms and exchange rate movements.