| The Vienna Institute for International Economic Studies - WIIW |
ABSTRACT
This paper examines vertical product differentiation in EU markets. In particular, it studies price/quality gaps and the position of East European producers in different quality segments of trade with the EU (including intra-EU trade). The general finding suggests extremely high price/quality gaps and very little representation of CEE producers in the high-quality segments of trade with the EU. Shifts in the position of CEE producers over the period 198894 are rather dramatic in relation to other international competitors. They also show a clear bifurcation in the developments of two groups: the 'Western' CEECs (comprising the Czech Republic, Hungary, Poland and Slovenia), and the 'Eastern' CEECs (comprising Bulgaria, Romania, Russia and Slovakia). While upward movements in the exchange rate relative to the PPP rate relate in the general sample (comprising all economies exporting to the EU) positively with upward movements in the price/quality position of exporters, such a relationship cannot be found with respect to CEE exporters. For this group of economies, particularly over the most recent period 199294, substantial price gap closures took place irrespective of the degree and directions of exchange rate to PPP rate movements.
Keywords: Trade with the European Union, competitiveness of Central and Eastern Europe, vertical product differentiation
JEL classification: F12, F14, F15, L1, L6, L15, P52, P23