This paper studies the relation between quality upgrading and pricing across firms and destination countries. The paper builds a model based on heterogeneous firms that set quality and prices to heterogeneous consumers. To test the predictions of this model, the paper uses a uniquely rich data that combines producer quality information and exporter prices by firm and destination country. Direct evidence on self-reported quality upgrading over time makes it possible to separate the quality effect from other sources of price variation, using a difference-in-difference-in-differences approach, that discerns quality upgrading by destination market and timing. Results document quality-based market segmentation, by which firms raise quality and prices at high-income destinations.
The paper shows that the difference in prices across countries is not driven by differences in market shares, markups, or elasticities of substitution, but by demand for quality in high-income destinations.