"Market Size, Trade and Quality: Evidence from French Exporters,"
CEPII Working Paper 2015- 14 , September 2015 , CEPII.
This paper presents the most direct test to date of the key welfare mechanism put forward by Melitz and Ottaviano (2008): the best firms increase sales disproportionately when competing in larger markets. I test this prediction in a quality context where the best firms produce the highest quality. The empirical analysis is guided by a quality-augmentation of Melitz and Ottaviano (2008). I capture product quality empirically using a unique dataset containing firm-level quality ratings. The results are in line with the key prediction of the model. I also find a strong positive relationship between a proxy for consumer quality preference and demand for quality which is consistent with the theory.
Heterogenous firms ; Flexible mark-ups ; Market size ; Quality ; Complementarities