Pricing to Market When Quality Matters

Pricing strategy has played an important role in consumer purchasing behavior and decision making process (Richard, 1985;. For international markets, pricing is one of the most important elements of marketing product mix, generates cash and determines a company's survival (Yaprak, 2001). However, scholars have not paid enough attention to international and export pricing (Kotabe and Aulak, 1993); . This paper examines factors that affect pricing decision for export markets, and sheds light on international pricing strategies in a global competitive market.

Economic Modelling, 2009

We illuminate the relationship between optimal firm pricing and optimal trade policy by exploring a generalized model that accommodates product differentiation at both the national and sub-national (firm) levels. We assume monopolistic competition in the differentiated products at the sub-national level. When the national and sub-national substitution elasticities are similar we find little opportunity for small countries to improve their

This paper studies the pricing to market (PTM) behaviour of Indian exporters during the economic reforms period (1992)(1993)(1994)(1995)(1996)(1997)(1998)(1999)(2000)(2001)(2002)(2003)(2004)(2005). A PTM model has been estimated using panel data at the four-digit level of classification for the G3 and three emerging markets (Brazil, China and South Africa), distinguishing also homogeneous from differentiated goods. Overall, we observe that there is clear evidence of incomplete exchange rate passthrough (ERPT) to buyers' currency prices. This degree of ERPT is net of changes in the level of protection faced by India's exporters (import tariffs in destination markets), inflation and openness in the export destination market, a macroeconomic policy index partly reflecting changes in exporter's costs, the share of the exporter in the destination market and the share of the product in the exporter's total exports. The empirical results indicate that Indian firms do practice PTM and absorb exchange rate changes into their mark-up in G3 markets, partly owing to tougher competition, but they fully pass-through the exchange rate changes in emerging markets. On the contrary, Indian exporters seem to be taking advantage of trade liberalisation in destination markets by marginally increasing the exporter currency prices into emerging markets but not into the G3. We also find a similar impact of trade liberalisation in the case of differentiated goods.

Annals of Economics and Finance, 2019

We present evidence using highly disaggregated Chinese firm-product data that increased import competition (resulting from reductions in output tariffs) induces incumbent exporters to increase product markups in export markets. This is driven by the upward markup adjustments of products closer to firms' core competencies, while products farther from core competencies have their markups lowered. We also investigate the underlying mechanisms empirically. Chinese multi-product exporters invest in improving the quality of their core products (which we term "quality-based core competency") and raise the quality more for products closer to their core competencies. This leads to heterogeneity in the responses of prices and markups to import competition. Our findings are robust to using alternative markup and import competition measures and different estimation methods, addressing endogenous issues and controlling for export and input tariffs. This paper contributes to the lit...

SSRN Electronic Journal, 2016

Two puzzling facts of international real business cycles are 1) weak or negative correlations between the terms of trade and output, and 2) a rise in relative consumption for countries where national goods become relatively more expensive. We show these puzzles either vanish or become much weaker in recent data. We propose a new mechanism that generates endogenous international price movements that are consistent with both the "old" and the "new" facts. In this mechanism, firms operating in a monopolistically competitive environment adjust price and quality of their products in response to technological shocks. This model is consistent with the old facts if price levels are not adjusted for quality. Instead, if quality adjustments to price level are introduced, the model's properties are in line with the new facts.

European Economic Review, 2015

Using Italian firm-level data for the period 2000-2006, this paper investigates the role of the quality of imported inputs and exported output in determining the heterogeneous response of exporters' prices to real exchange rate fluctuations. The analysis confirms previous findings that the imports of intermediate inputs and the quality of the exported output increase an exporter's ability to reduce the exchange rate passthrough into the prices perceived by foreign consumers. Our novel finding is that the 'intermediate imports channel' has a weaker negative impact on the exchange rate pass-through into the price of higher quality exported varieties. The paper shows that this finding is consistent with the predictions of a model where both the suppliers of high quality intermediate inputs and the exporters of high quality final goods follow pricing strategies that offset exchange rate variations.

2009

This paper presents a unified framework for analyzing several factors that have been independently studied as determinants of unit values in international trade: product differentiation by quality (which suggests that unit values should be positively correlated with exporters' per capita income), pricing-to-market (which suggests they should be positively correlated with importers' per capita income), and non-tariff measures (which suggests that remaining residuals may contain evidence of trade barriers). On a large sample of bilateral unit values for 2005, we find that about 58 percent of all HS-6 products demonstrate both significant quality-ladder effects and pricing-to-market effects, with quality-ladder effects predominating in importance. Distancerelated effects appearing directly in prices appear significantly larger than one would expect as a result of shipping margins. We also rank importers by the remaining unexplained variation in import prices, and examine whether these variations are plausibly related to non-tariff measures. JEL Classification: F12, F14 1 This paper represents solely the views of the authors and does not represent the views of the U.S. International Trade Commission or any of its Commissioners. The timely assistance of Ronald Jansen and his team at the United Nations Statistical Division with various puzzles involving the COMTRADE data is gratefully acknowledged.

IMF Working Papers

We investigate theoretically and empirically how exporters adjust their markups across destinations depending on bilateral distance, tariffs, and the quality of their exports. Under the assumption that trade costs are both ad valorem and per unit, our model predicts that markups rise with distance and fall with tariffs, but these effects are heterogeneous and are smaller in magnitude for higher quality exports. 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.

2009

Using a rich dataset of Chilean exporters, we analyze several issues related to the relationship between entry into export markets and product quality. We find that every year a large number of new exporting relationships are initiated, but the survival rate of these entries is very low and declines over time. Using unit values as a proxy for product quality, our estimations show that entry is generally associated with higher product quality. This higher product quality, however, tends to reduce over time and eventually disappears three years after entry. To better identify this effect, we explore whether there are systematic differences across sectors. As expected, for sectors in which quality differentiation may be important, our findings reveal that reference-price and differentiated products show a higher price in the year of entry and it takes longer to converge to the incumbent prices. These results hold after controlling for potential sample selection bias. * We thank Daniel Lederman, Bill Maloney, and an anonymous referee for valuable comments and suggestions. We also thank Waldo Riveras for excellent research assistance.

SSRN Electronic Journal, 2013

This paper presents theory and evidence from highly disaggregated Chinese data that tariff reductions induce a country's producers to upgrade the quality of the goods that they export. The paper first documents two stylized facts regarding the effect of trade liberalization on export prices and its relation with product differentiation. Next, the paper develops a simple analytic framework that relates a firm's choice of quality to its access to imported intermediates. The model predicts that a reduction in the import tariff induces an incumbent importer/exporter to increase the quality of its exports and to raise its export price in industries where the scope for quality differentiation is large while to lower its export price in industries where the scope for quality differentiation is small. The predictions are consistent with the stylized facts based on Chinese data and robust to various estimation specifications.