A quality-adjusted AIDS model in the study of French imports

Abstract

To study price and quality competitiveness across 5 exporting regions towards France, we estimate price and quality elasticity on French imports and compare these elasticities between the services and goods sectors using the World Input-Output Database. To estimate these elasticities, we use an Almost Ideal Demand System (AIDS) augmented with a quality variable. The value added of this new AIDS is that it ensures realistic assumptions on individual's preferences on quality are held. We use an original proxy for quality which includes both direct innovation efforts and positive externalities originating from innovation efforts made by other countries and other sectors. Our empirical results confirm that correcting for quality improves the estimation of price elasticities. The results also demonstrate the type of competitiveness across different regions notably developed countries compete in quality while developing countries compete in prices; but BRIC countries are beginning to compete in quality.