Finance and Economics Discussion Series

Price and Quality Dispersion in an Offshoring Market: Evidence from Semiconductor Production Services

David M. Byrne, Brian K. Kovak, and Ryan Michaels
2013-06

Abstract: We study cross-country differences in price and quality in the market for semiconductor wafer manufacturing services. Using a proprietary transaction-level data set, we document i) substantial constant-quality price differences across suppliers, and ii) shifts toward lower priced suppliers. Chinese producers on average charged 17% less than leading Taiwanese producers for otherwise identical products and increased their market share by 14.7 percentage points. The extent of cross-country price dispersion is also diminishing over a product's life. A model with costs of switching suppliers is consistent with these pricing dynamics and can sustain realistic quality-adjusted price dispersion.

Keywords: Pricing, intra-industry trade