Endogenous Vertical Differentiation, Variety, and the Unequal Gains from Trade

How unequal are the gains from trade? This paper develops a structural framework to quantify the consequences of international trade on welfare of consumers across the income distribution, allowing for non-homothetic demand and endogenous quality choices by firms. Using random coefficients demand estimation techniques, I infer demand and supply parameters, as well as household-specific price indexes for more than 3,000 distinct industries and find the gains from trade to be moderately unequal except in wealthier and small economies. Further, not accounting for endogenous vertical differentiation would overstate the impact of trade on cost-of-living inequality by close to 50%.

Quality Overprovision in Cable Television Markets

We measure the welfare distortions from endogenous quality choice in imperfectly competitive markets. For US cable television markets between 1997–2006, prices are 33 percent to 74 percent higher and qualities 23 percent to 55 percent higher than socially optimal. Such quality overprovision contradicts classic results in the literature and our analysis shows that it results from the presence of competition from high-end satellite TV providers: without the competitive pressure from satellite companies, cable TV monopolists would instead engage in quality degradation. For welfare, quality overprovision implies cable customers would prefer smaller, lower-quality cable bundles at a lower price, amounting to a twofold increase in consumer surplus for the average consumer. (JEL L13, L15, L82)