The Importance of Being Different: Product Differentiation and the Duration of Trade

This paper studies how product differentiation affects the dynamics of US import trade. Using nonparametric and semiparametric techniques we find that trade in homogenous and reference priced products is of much shorter duration than trade in differentiated products. Differentiated products have a median survival time of five years; reference priced goods and homogenous products have a median survival time of only two years. As compared with differentiated products the hazard rate for reference priced goods is 16 percent higher and for homogenous goods 20–24 percent higher. Importantly, we find that these results are not driven by small trade relationships. To the contrary, we find that the differences in survival rates among the product types increase when we drop the smallest trade relationships. If we limit our analysis to those observations whose trade value in the first year is greater than $100,000 we find that the hazard rate for reference priced goods is 50 percent higher and for homogenous goods is 60–85 percent higher. These results provide compelling evidence that trade in differentiated goods is different than trade in homogenous goods. ∗Department of Economics, New Jersey Hall, Rutgers University, New Brunswick, NJ 08901, [email protected] †Department of Economics, New Jersey Hall, Rutgers University, New Brunswick, NJ 08901, [email protected]