Comparative advantage, product quality, and the competitiveness of firms
Abstract
Purpose
The purpose of this paper is to emphasize the importance of product quality in differentiated-products markets in determining the structure of competition among firms.
Design/methodology/approach
First, two distinct models of firm heterogeneity are considered as two possible structures for firms’ competition: “price competition” and “quality competition.” Then, the author exploits the bilateral trade data of the world’s 83 largest countries in order to examine a link between the empirical findings and the theoretical models.
Findings
The empirical findings support a model of “quality competition” rather than “price competition,” in which firms in a country with a comparative advantage in a given product tend to improve their product quality as opposed to lowering production costs, so they compete on the quality-adjusted price.
Research limitations/implications
This paper used product-level data to examine the spatial pattern of the average export unit value of a product, which is able to answer the question of whether an industry is involved with quality competition. The product-level data used in this study, however, are not ideally suitable for exploring the predictions of a heterogeneous firms’ trade model.
Originality/value
To the best of the author’s knowledge, this is the first paper that investigates a relationship between the country-product pair of comparative advantages and firms’ self-selection behavior in the product-level data to shed light on the role of product quality in determining the structure of firms’ competition.
Keywords
Acknowledgements
The paper has benefited from comments by seminar participants in the KIEP seminar. The author would like to thank the anonymous reviewers for their helpful comments. The errors remain the author’s responsibility.
Citation
Whang, U. (2017), "Comparative advantage, product quality, and the competitiveness of firms", Journal of Korea Trade, Vol. 21 No. 3, pp. 174-190. https://doi.org/10.1108/JKT-06-2017-0061
Publisher
:Emerald Publishing Limited
Copyright © 2017, Korea Trade and Research Association