Estimations 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, this paper shows that optimal product quality depends on a parameter of the consumer utility function and firm cost of production. In addition, a firm’s unobserved product quality is structurally linked to its observed sales revenue. The structural relationship allows one to estimate the product quality within an industry. We then utilize firm level data from China over the 2005-2007 period 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