Authors: Maria Bas, Philippe Martin and Thierry Mayer

This report reviews the state of the art of the literature on measures of quality adjusted competitiveness. The report starts by an analysis of how the recent theoretical literature on heterogeneous firms’ trade models has introduced product quality on both the demand and the supply side. The first family of models relies on the idea that consumers value quality. The valuation of quality is reflected on their willing to pay a higher price for high quality goods. On the supply side, firms’ quality choice depends on the quality of inputs (skill labor or intermediate goods) used in the production of final goods. Also, producing high-quality goods is costly with marginal costs increasing in the level of quality of the final good but also involves a sunk investment cost in quality upgrading. The paper presents the recent empirical methodologies developed in the literature to estimate product quality using microdata.

The early literature relied on unit values to capture differences in quality at the product level. The more recent literature disentangles price and quality using trade values and quantities to obtain a quality-adjusted measure of unit values. The identification strategy of these works infers quality from a demand function. Quality differentiation across products is then associated to product characteristics that are valued by consumers. The paper then describes alternative measures of non-price competitiveness at the firm level in particular related to R&D and other technological investments. Finally, it analyzes the recent findings of works that focused on how macroeconomic shocks affect firms’ competitiveness.