Pricing to Market When Quality Matters

Abstract

We build a model of price differentiation with firm heterogeneity, which allows for imperfect competition and market segmentation in the presence of flexible exchange rates as well as horizontal and vertical differentiation and different tastes of consumers in destination markets. We empirically assess the main predictions of our theoretical framework by using firm-level data surveyed by ISAE. We document that export-domestic price margins are significantly affected by price and quality competitiveness even controlling for foreign demand conditions, size, export intensity, destination markets and unobservables. Finally, we provide evidence of a strong heterogeneity across firms in their reaction to price and quality competitiveness.

Keywords: Pricing to market, qualitative choice models, firm heterogeneity

JEL Classification: D21, F10, C23, C25