find it worthwhile to cover the extra costs of exporting. The second
answer focuses on product quality. A growing body ofwork has provided
evidence that successful exporters charge higher prices on average,
suggesting that quality matters.1
This study integrates these two views and shows both theoretically
and empirically that firmsmay choose to compete on the basis of either
cost or quality depending on the characteristics of the products they sell
and the markets in which they operate.2 Unlike other studies which
have compared the behavior of different firms, and emphasized the
between-firm extensive margin, we focus on the portfolio of products
sold by multi-product firms, and highlight what Eckel and Neary
(2010) call the “intra-firm extensive margin”. Our theoretical innovation
is to construct a model of multi-product firms in which the quality
of goods is determined endogenously by the firms' profit-maximizing