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Hylke Vandenbussche
The measurement of quality is a difficult task given that quality typically is an unobserved product characteristic. In this paper we develop a new “Quality Indicator” based on a structural model with an identifiable quality parameter. We follow the methodology proposed by Di Comité, Thisse and Vandenbussche (2014). This method offers an easy way to generate product-level quality ranks of exported products (manufacturing CN8). Moreover, it overcomes some of the flaws present in other quality measures. The quality metric used here is an improvement over existing ones, since it disentangles quality from cost and taste effects. A failure to do so, results in quality effects that are wrongly identified. Product-level export price data come from Comext (Eurostat) and cost data are obtained from the firm-level database ORBIS. When we apply this method on individual EU countries exports' of products to a common destination, we obtain distributions of "export quality" and its change over time in the period (2007-2011). A striking finding is the large extent of quality dynamics going on in the EU market. We show that quality can run in different direction than market share i.e. products with the largest market shares, need not have the highest quality. We also estimate a price elasticity of quality which is positive and significant. This suggests that quality upgrading results in a higher willingness to pay by consumers and therefore offers a way to escape cost competition.
