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

We study price and quality differences across international intermediate input suppliers. Our uniquely detailed transaction-level data exhibit large price differences across suppliers of observationally identical products, but these price gaps narrow over the product life cycle. We disentangle pure (frictional) price dispersion from unobserved quality differences using a framework in which switching suppliers is costly. We construct a quality-adjusted price index using these results and show that pure price dispersion biases standard indexes upward. Finally, we demonstrate how to bound the true constant-quality price index using commonly available data and without making strong market structure assumptions.