Markups, Quality, and Trade Costs

One of the most robust findings in the empirical trade literature is that exporters charge higher prices on exports to more distant countries. In this paper, we argue that the positive relationship between export prices and bilateral distance is largely driven by variable markups, and is moreover heterogeneous across products differentiated by quality. To this end, we rely on a model which assumes that trade costs are both ad valorem and per unit, implying that firms charge higher markups and therefore higher prices on exports to more distant countries, but the effects are predicted to be smaller in magnitude for the higher quality varieties. We find strong support for the predictions of the model using a unique data set of Argentinean firm-level wine exports combined with experts wine ratings as a measure of quality.

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