Does quality differentiation matter in exporters' pricing behaviour? Comparing China and India |
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| Institution: | 1. Queen Mary University of London, UK;2. University of the Balearic Islands, Spain;1. Center for Economic Research, Shandong University, Jinan, Shandong 250100, China;2. Institute for Studies in County Development, Shandong University, Jinan, Shandong 250100, China;3. Centre for the Health Economy, Macquarie University, New South Wales 2109, Australia;4. Department of Economics, Monash Business School, Monash University, Victoria 3800, Australia;1. Chongqing University, China;2. University of Nottingham, United Kingdom;3. Fudan University, China;4. Agricultural Bank of China, Zhejinag Branch, China;5. School of Contemporary Chinese Studies, University of Nottingham, United Kingdom;6. School of Economics and Business Administration, Chongqing University, China;1. Central University of Finance and Economics, Beijing, China;2. Southwestern University of Finance and Economics, China;1. CEPII, France;2. Université Paris Dauphine, PSL Research University, LEDa and CEPII, France;3. Paris School of Economics (University Paris 1) and CEPII, France |
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| Abstract: | The product quality dimension has been rarely mentioned as a factor explaining the heterogeneous pricing strategies of exporters. This could underestimate the degree of mark-up adjustment and the extent of incomplete exchange rate pass-through (ERPT) at a disaggregated level across products and destination markets. This paper investigates the role of quality differentiation in price discrimination using data for China and India's exports disaggregated at the 6-digit product level across destination markets. The paper adopts an empirical approach that incorporates gravity model explanatory factors and allows disentangling the effect of quality on trade prices and volumes from that of other sources of price variation. After excluding short duration export spells, China's export prices denominated in foreign currency terms increase with the yuan's depreciation, implying an increase in exporters' mark-ups, but they decrease as expected in the case of India. However, mark-up increases decline with product quality and destination market income, as the elasticity of demand perceived by exporters increases. These findings remain robust to different measures of quality, samples, specifications, and to the potential endogeneity of quality. |
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