| The Vienna Institute for International Economic Studies - WIIW |
ABSTRACT
This paper presents a detailed econometric investigation of vertical product (i.e. quality) differentiation in EU markets. Use is made of trade statistics at the most detailed (8-digit CN) level to analyse the pattern of quality positioning in EU trade (of EU members and non-EU countries). Two different 'quality indicators' are devised: one refers to the relative representation of producers in different quality segments in EU markets, the other amounts to the compilation of industry-level price gaps. Evidence is found for dramatic and rather stable hierarchical structures in the product qualities supplied by different national producers. The quality hierarchies are then related to a host of supply-side variables: wage rates, productivity levels, industrial research and development spending, exchange rate movements. The econometric analysis supports a rather robust explanatory framework relating the quality positioning of national producers to their relative supply-side characteristics.
Keywords: Vertical product differentiation, international trade, quality competition, EU markets
JEL classification: C23, F12, O31, O32