Import Price and Quality Adjustment during a Large Devaluation

We empirically characterize price and quality adjustment on manufactured imports in the event of a large contractionary devaluation. We use microdata on the universe of products imported by Argentina during 1999-2004. Demand... [ view full abstract ]

We empirically characterize price and quality adjustment on manufactured imports in the event of a large contractionary devaluation. We use microdata on the universe of products imported by Argentina during 1999-2004. Demand estimation assigns higher quality to varieties with higher market shares conditional on prices. While real imports collapsed 62% between 1999-2002, average prices and estimated qualities of imported products decreased by nearly 16% and 0.25 s.d., respectively. Relatedly, low-price/quality varieties increased its participation in the imports bundle. Motivated by this facts we rely on structural modelling to quantify product-level price and quality adjustment. We develop a theoretical framework where firms sell one differentiated variety in a market characterized by monopolistic competition and consumers choose the variety that provides her with the highest indirect utility. A negative income shock yields two comparative static results that enable us to simulate counterfactual product-level prices. Our estimates closely match observed price changes. Simulation's results suggest that variety's quality adjustment accounts for 50-57% of product-level price reductions, compositional effects accounts for 31-41% and markups adjustment explains roughly 10-17%.