Abstract
This paper studies price and quality differences across international intermediate input suppliers. We develop price measures that account for (i) differences in product characteristics, (ii) unobserved quality differences, and (iii) pure (frictional) price dispersion across suppliers. Using uniquely detailed transaction- level data from the semiconductor industry, we document large average price differences across suppliers for observationally identical products, and find that price differentials close over the product life cycle. We interpret this finding in a model where buyers face costs of switching suppliers. The theory demonstrates how to use the observed price dynamics to adjust prices for unobserved quality differences across suppliers. The results of this analysis reveal that pure price dispersion and unobserved quality differences are both important in this market. These two features make it difficult to construct constant-quality import price indexes, which generally assume away pure price dispersion. We document the resulting upward bias in standard price indexes, develop a quality-adjusted index for semiconductor fabrication, and propose a general method for bounding the true constant-quality price index.
Highlights
Accurate measures of market prices are centrally important in all branches of applied economic analysis
Along with Houseman, Kurz, Lengemann and Mandel (2011), we argue that standard index construction methods used by statistical agencies such as the Bureau of Labor Statistics (BLS) in their International Price Program (IPP) systematically omit price declines occurring when buyers substitute
We document large price differences across suppliers of observably identical products, and show that the price gaps converge over the life of a given product generation
Summary
Accurate measures of market prices are centrally important in all branches of applied economic analysis. We utilize uniquely detailed data from the semiconductor industry to observe physical product characteristics, and develop a novel approach to inferring unobserved quality differences across suppliers. These methods allow us to estimate constant-quality price dispersion, which is substantial in this market. We develop a novel method using these dynamics to adjust observed price differences for unobserved heterogeneity This remains a concern, despite our exhaustive information on physical product attributes, because there may be differences across suppliers in hard-to-measure aspects of transactions, such as customer service or design assistance, that are not reflected in physical product features.
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