Learning, Prices, and Firm Dynamics

RePEc Short ID: pdi137
ORCID iD: 0000-0003-1185-7125

Bastos, Paulo; Dias, Daniel A.; Timoshenko, Olga A.

doi:10.17016/IFDP.2017.1193

Working Paper

Learning, Prices, and Firm Dynamics

Abstract: We document new facts about the evolution of firm performance and prices in international markets, and propose a theory of firm dynamics emphasizing the interaction between learning about demand and quality choice to explain the observed patterns. Using data from the Portuguese manufacturing sector, we find that: (1) firms with longer spells of activity in export destinations tend to ship larger quantities at lower prices; (2) older exporters tend to use more expensive inputs; (3) revenue growth within destinations (conditional on initial size) tends to decline with market experience; and (4) input prices and quantities tend to increase with revenue growth within firms. We develop a model of endogenous input and output quality choices in a learning environment that is able to account for these patterns. Counterfactual simulations reveal that minimum quality standards on traded goods reduce welfare by lowering entry in export markets and reallocating resources from old and large towards young and small firms.

Keywords: Learning about demand; Prices; Product quality; Firm dynamics; Quality standards;

JEL Classification: F12; F14; L11; O14;

https://doi.org/10.17016/IFDP.2017.1193