Study: What drives market share changes? Price versus non-price factors
New research paper by Konstantins Benkovskis, SSE Riga Associate Professor and researcher at the Bank of Latvia, and Julia Wörz, researcher at the Oesterreichische Nationalbank, proposes a theoretical framework for explaining gains and losses in export market shares by considering both price and non-price determinants.
Highlights of the study:
• Measuring changes in export market shares is a natural way to assess a country’s competitiveness as rising shares reveal the strong performance of a country’s producers in international markets and vice versa. Usually the dynamics of market shares are explained by changes in the real effective exchange rate. In our paper we show that the contribution of taste and quality to export market shares is substantial. This means that real depreciation of the exchange rate is not the only way to boost exports: improving quality is another way of stimulating exports.
• We found that developing countries have experienced impressive gains in taste and quality in the current decade. This indicates that countries like China succeeded in climbing up the quality ladder, or consumer preferences shifted in favour of products made in developing countries. It also means that the contribution of the yuan exchange rate to China's success could be overestimated.
• At the same time G7 countries suffered losses in taste and quality. However, this was not related to an absolute decline in quality, but rather reflects a declining gap between the quality of goods produced in developed and developing countries.
• We should acknowledge that the rising quality of production in developing countries may be partially related to the globalisation process, which is moving the final assembly of high-quality products from rich countries to emerging economies.