Scandinavian Working Papers in Economics

Working Papers,
University of Aarhus, Aarhus School of Business, Department of Economics

No 08-18: Price as an Indicator for Quality in International Trade?

Jørgen Drud Hansen () and Jørgen Ulff-Møller Nielsen ()
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Jørgen Drud Hansen: Department of Economics, Aarhus School of Business, Postal: The Aarhus School of Business, Prismet, Silkeborgvej 2, DK 8000 Aarhus C, Denmark
Jørgen Ulff-Møller Nielsen: Department of Economics, Aarhus School of Business, Postal: The Aarhus School of Business, Prismet, Silkeborgvej 2, DK 8000 Aarhus C, Denmark

Abstract: This paper examines the relation between price differences and quality differences in an oligopoly model with intra-industry trade, where goods are horizontally as well as vertically differentiated. The analysis demonstrates that the ratio of prices is not linked to the ratio of qualities in any simple way. The paper therefore questions empirical trade studies using unit values as an indicator for the quality of the traded goods.

Keywords: Horizontal product differentiation; Vertical product differentiation; Intraindustry trade; Price ratio; Quality ratio; Unit values

JEL-codes: F12; F13

34 pages, January 1, 2008

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