Why do firms charge different prices for similar products exported to different destinations?
And what factors can explain the variation in firms’ export sales across destinations? Several demand and supply side fundamentals, which affect firms’ production costs and product prices, may be relevant. Understanding the role of these factors is of direct interest to firms in seeking their profitability objectives and policymakers in shaping policies to foster competition. The objective of this study is to analyze the impact of several demand and supply side factors that affect firms’ pricing and export sales behavior by utilizing firm-level data on the food-processing sector in different countries, including Italy, France, and Hungary, as case studies.
We first analyze the impact of product quality and consumers’ taste on firms’ pricing behavior in the example of Italian firms. We show that variations in firms’ pricing behavior, measured as markup of firms’ price over marginal cost, can be importantly explained by the variation in firms’ product quality and differences in consumers’ tastes in export destinations. Firms, to enhance their profitability, may strategically increase their product quality and/or impose higher market power in export destinations where there is higher consumer taste.
Next, we analyze the impact of product quality, consumers’ tastes, and firms’ efficiency on firms’ export revenues using the example of the French food processing sector. We show that there is significant heterogeneity in cost efficiency and product quality across firms, and significant differences in consumers’ tastes across export destinations. Our results show that these factors are important in the export success of firms but taste and quality are much more central than the marginal cost in the success of French food firms abroad. Our finding in this respect reinforces the necessity to offer appealing products to meet consumers’ demands.
Finally, we measure firms’ markup and analyze its impact on firms’ export participation and export intensity using the example of the Hungarian food processing sector. We show that firms are heterogeneous in terms of markups, whereas there are many firms with small markups but few firms with large markups; markups are on average higher for exporters than non-exporters.
We further show that higher markups lead to increased participation in the export market; an increase in markups is associated with firms staying in the export market for at least two consecutive years. These results suggest that while firms’ decisions to rely on internal resources to increase markups and to participate in export markets reinforce each other, domestic 6 competition policies that reduce firms’ markups may counteract trade policies designed to increase firms’ participation in export markets.
While our main contribution is to answer the above-mentioned questions, we also technically contribute to the literature in several ways. We introduce approaches to measure consumers’ tastes and product quality relying on estimations of firms’ demand functions. The generated taste and quality parameters are useful for modelers that aim to rely on simulation models, mainly partial and general equilibrium models, for policy analysis of their interest. We provide and apply strategies to consider the simultaneity between firms’ export sales and pricing
behavior; and firms’ fundamentals, such as product quality and production efficiency, by relying on instrumental variables techniques. Considering the simultaneity allows for the analysis of the causal impacts of firms’ fundamentals on their export price and sale.