Estimation of product quality in China's food processing and manufacturing industries

Using a product variety model, where higher-quality products increase consumer utility and quality products are more costly to produce, we show that optimal product quality depends on a parameter of the consumer utility function and the firm's cost of production. Our theoretical analysis shows that a firm's unobserved product quality is structurally linked to its observed sales revenue; the structural relationship allows estimation of the product quality within an industry. We then utilize firm-level data from China from 2005 to 2007 to estimate product quality in China's (i) food processing and (ii) food manufacturing industries. By comparing the distributions of product quality (and product quality growth rates) over time, we argue that product quality in both industries is improving.

Automated summary

Using a product variety model and theoretical analysis, optimal product quality can be determined based on consumer utility and production cost, allowing estimation of product quality within industries. The study shows that product quality in China's food processing and food manufacturing industries is continuously improving.