SMU SOE Seminar (May 22, 2017): One Way to the Top: How Services Boost the Demand for Goods

Goods and services are generally analyzed as two different items in the consumer portfolio supplied by firms in separate industries. In this paper, we challenge this view by providing evidence on interactions within the firm between foreign sales of goods and services. We show empirically and theoretically that demand complementarities between both activities enable firms that export goods and services - we call them bi-exporters - to boost their manufacturing exports by also providing services. The provision of services thus participates to the perceived vertical differentiation of the goods. Under monopolistic competition, adding a service boosts firms’ sales only through quantities. Accounting for large oligopolistic firms uncovers instead a different channel: bi-exporting may increase firms’ market power that translates into higher prices. Our IV estimates show the price channel to be important. These results have several important implications, in particular for the analysis of the determinants of the perceived quality of firm-level production and of firm-level price dispersion across destinations.

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