Markups, quality, and trade costs

• Published in: Journal of international economics Vol. 137; p. 103627
• Main Authors: Chen, Natalie, Juvenal, Luciana
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01-07-2022
• Subjects: Export unit values; Heterogeneity; Markups; Quality; Trade costs; Wine; Trade costs; Wine; Heterogeneity; Markups; Quality; F12; F14; Export unit values; L11
• ISSN: 0022-1996; 1873-0353
• DOI: 10.1016/j.jinteco.2022.103627

•Exporters price discriminate across destinations depending on trade costs.•Exporters raise markups in distant markets and lower them in high-tariff countries.•The extent of price discrimination is weaker for higher quality exports.•These patterns arise if demand is subconvex but more convex than log-concave.•The variation in export prices is driven by markup variation conditional on quality.
This paper examines how trade costs induced by geographic distance or bilateral tariffs impact the markups of exports differentiated by quality. It relies on a data set that combines Argentinean firm-level wine exports with experts’ wine ratings as a measure of quality. Exporters price discriminate across destinations by raising markups in more distant markets, and by lowering them in high-tariff countries. However, the response of markups to changes in trade costs is heterogeneous and weaker for higher quality exports. These empirical patterns can be predicted by trade models featuring demand functions more convex than log-concave, but less than superconvex. They demonstrate that the variation in firm-level export unit values across markets is not only driven by quality differences but also by markup variation conditional on quality.