Foreign Competition along the Quality Ladder.

This article investigates the heterogeneous impact of low-cost foreign competition, particularly from China, on firms along the quality and price distribution, focusing on French exporters in the footwear industry from 1997 to 2010. It develops and estimates a random-coefficient nested logit (RCNL) demand model with endogenous product quality, allowing for rich substitution patterns across product categories and origins, and heterogeneous consumer preferences influenced by income. The findings reveal that low-price, low-quality firms suffer disproportionately from increased Chinese competition, losing significantly more market share and profits than high-price firms, with vertical differentiation (quality differences) accounting for about half of this heterogeneity. While firms respond by upgrading product quality and adjusting markups to partially mitigate these effects, the high costs of quality improvement limit the extent of this adjustment. The study underscores the importance of accounting for consumer heterogeneity and endogenous quality choices to understand the differentiated effects of trade shocks on firm performance.