A Gravity Model Of Trade Study On Export Prices Of Chinese Private Firms

The traditional theories of international trade argue that various geography characteristics ofdestination markets impact export prices. This article bases on the gravity model of trade and thetheories of heterogeneous firm, and studies the relationship between Chinese private firmproduct FOB prices and various geography characteristics of destination markets, which is anextension of existing researches. The proxy for trade barrier is bilateral distance, and the proxiesfor demand are market size and income per capita of destination markets. The Chinese exportdata in2005shows that private firms charge substantially higher prices to markets other thanHong Kong, Macau and Taiwan. When the samples of Hong Kong, Macau and Taiwan areexcluded, product-level export prices decrease with bilateral distance significantly but do notchange with market size. However, firm-product-level export prices increase with demandsignificantly. If the GDP or GDP per capita of destination market doubles export prices increaseby1.4%and2.7%respectively. But prices change with bilateral distance insignificantly.Moreover, products with differential characteristic are charged higher prices and the degree ofprice dispersion is greater in larger and richer markets, but not in more distant ones. These resultsmay reflect that Chinese private firms export vertically-differentiated varieties to differentmarkets, and the competitions between and within firms promote only those of higher quality toexport to larger and richer markets, but not to more distant ones.