Firm Mechanisms for Export Price Determination

The "shipping the good apples out" effect—free-on-board (FOB) average unit values (AUV) increase with geographical distance—is well established and has profound implications for understanding the composition of trade flows in vertically differentiated products. While the literature also finds within-products FOB AUV increases with the importing nation's GDP per capita and decreases with the importer's market size (GDP), the exact firm-level mechanisms of these adjustments are not precisely known. In this paper, transaction-level data for Chilean exports is used to show that the positive effect of distance on the firms' FOB AUV of exports depends crucially on destination coverage of exports by the exporting firms. Firms that sell multiple products to multiple destinations do not adjust their prices in response to distance. The adjustment occurs primarily due to single product-destination firms that sell more expensive goods to more distant markets. However, all firms raise FOB AUV with the GDP per capita of the destination and decrease for market size. Similar destination catering effects emerge when categorizing firms by low- and high-quality, where the low-quality firms adjust FOB AUV for destination distance and the high-quality do not. These mechanisms suggest a close link exists between quality upgrading and the success of exporting firm's development.