Multi-Product Firms and Product Quality

Abstract

This paper argues that quality differentiation is an important feature of the operations of multi-product ?firms. 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 bring higher sales despite being more expensive. We base these conclusions on four stylized facts that we establish using detailed customs data for China. 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. We rationalize these stylized facts with a model of international trade with multi-product, multi-quality fi?rms. Our results have important implications for the effects of trade reforms and the design of trade-promoting policies