Abstract
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.
Highlights
One robust ...nding in the empirical trade literature shows that exporters set higher Free on Board (FOB) export prices in more distant countries
Our predictions are driven by the introduction of per unit trade costs in the model as the latter generate an elasticity of demand to the FOB price that depends on trade costs and quality (Crozet et al, 2012; Irarrazabal et al, 2015; Martin, 2012)
As our results are mainly driven by the high performance ...rms that contribute to the bulk of aggregate exports, we expect our ...ndings to matter in explaining aggregate export prices and markups
Summary
One robust ...nding in the empirical trade literature shows that exporters set higher Free on Board (FOB) export prices in more distant countries. To compensate for the lower demand they face due to higher trade costs, exporters ...nd it pro...table to raise their prices in more distant markets, to lower them in high-tari¤ countries, and to a larger extent for lower quality exports These predictions are not speci...c to our CES framework and we show that they continue to hold with alternative demand systems. We demonstrate that the e¤ects of distance and tari¤s on prices survive the inclusion of product-time ...xed e¤ects This speci...cation provides direct evidence that exporters raise their markups in more distant markets, and lower them in high-tari¤ countries. As the markup of a given product with a given quality varies across export markets depending on distance and tari¤s, we conclude that trade costs play a key role in generating deviations from the Law of One Price.
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