Helble, MatthiasOkubo, Toshihiro2012-05-292012-05-292008-03https://hdl.handle.net/10986/6558There is increasing empirical evidence that vertical product differentiation is an important determinant of international trade. However, the economic literature so far has solely focused on the case in which quality trade stems from differences between countries. No studies investigate the role of quality trade between similar economies. This paper first develops a simple theoretical trade model that includes vertical product differentiation in a heterogeneous-firm framework. The model yields three main predictions for trade between similar economies. First, exported goods are of higher quality than goods sold on the domestic market. Second, larger economies have on average higher export qualities compared with smaller economies. Third, with increasing trade costs higher quality goods are exchanged. For all three effects, strong empirical support is found using detailed export trade data of the United States and 15 European Union countries.CC BY 3.0 IGOADVERTISINGAGGREGATE DEMANDAIMAIRCRAFTAVERAGE PRICEAVERAGE PRICESBILATERAL TRADEBRANDSCAPITAL STOCKCFSCLOSED ECONOMYCOMMERCIAL POLICYCOMMODITYCOMMON MARKETCOMPARATIVE ADVANTAGECOMPETITION EFFECTCOMPETITIVENESSCONSTANT ELASTICITY OF SUBSTITUTIONCONSTANT RETURNS TO SCALECONSUMER PRICESCONSUMERSCURRENCYDEMAND FUNCTIONDEVELOPMENT ECONOMICSDOMESTIC MARKETDOMESTIC PRODUCTIONECONOMIC GEOGRAPHYECONOMIC SIZEECONOMIC THEORYELASTICITYELASTICITY OF SUBSTITUTIONEXOGENOUS VARIABLESEXPENDITUREEXPORT MARKETEXPORT MARKETSEXPORT PERFORMANCEEXPORT PRICEEXPORT PRICESEXPORT TRADEEXPORTERSEXPORTSFACTOR ENDOWMENTSFACTOR PRICEFACTOR PRICESFIXED COSTSFOREIGN DIRECT INVESTMENTFOREIGN MARKETFOREIGN PRODUCERSFOREIGN SALESFREE TRADEFREIGHTFREIGHT COSTSFREIGHT RATESFUTURE RESEARCHFUTURE STUDIESGDPGRAVITY EQUATIONGRAVITY MODELHARMONIZED SYSTEMHOME MARKETHUMAN CAPITALIMPACT OF TRADEIMPORT PENETRATIONINCOME EFFECTINCOME LEVELSINCREASING RETURNSINDUSTRIAL ECONOMICSINDUSTRY TRADEINTERNATIONAL MARKETSINTERNATIONAL TRADELABOR MARKETMANUFACTURINGMARGINAL COSTSMARKET ACCESSMARKET COMPETITIONMARKET SHAREMARKET SIZEMARKET SIZE EFFECTSMEASURE OF TRADEMONOPOLISTIC COMPETITIONNATIONAL INCOMENET EXPORTERNOMINAL PRICEPATTERN OF TRADEPATTERNS OF TRADEPER CAPITA INCOMEPERFECT COMPETITIONPOLITICAL ECONOMYPRICE COMPETITIONPRICE DISCRIMINATIONPRICE MECHANISMPRODUCT DIFFERENTIATIONPRODUCT QUALITYPRODUCTIVITYPROFIT FUNCTIONSSALESSHIPMENTSSHIPPINGSHIPPING COSTSSOUTH AMERICANSPECIALIZATIONSUPPLIERSTARIFF DATATECHNOLOGY TRANSFERTELECOMMUNICATIONSTERMS OF TRADETOTAL COSTSTRADE COSTSTRADE DATATRADE FACILITATIONTRADE FLOWSTRADE LIBERALIZATIONTRADE MODELSTRADE MORETRADE PARTNERSTRADE PATTERNTRADE PATTERNSTRANSPORT COSTSTURNOVERUNEMPLOYMENTUNIT OF CAPITALUNSKILLED LABORUTILITY FUNCTIONVALUE OF EXPORTSVALUE OF TRADEVARIABLE COSTSWAGESWorld Bank10.1596/1813-9450-4550