We show that the effect of fixed costs on international trade is lower in industries with a high degree of vertical product differentiation. We extend an international trade model by endogenous quality investmetns and use both aggregate trade data and firm-level data to estimate gravity equations of exports. Accounting for quality lowers the positive gains from trade and leads to more heterogeneous effects across industries compared to a trade model without quality.
F12 - Models of Trade with Imperfect Competition and Scale Economies ; F14 - Country and Industry Studies of Trade ; L11 - Production, Pricing, and Market Structure Size; Size Distribution of Firms