| Summary: | How unequal are the gains from trade? In this paper, I argue that the answer depends crucially on how much exporters vertically differentiate in response to foreign competition and study the consequences of international trade on welfare of consumers across the income distribution. I develop a structural model in which consumer demand for higher-quality goods is non-homothetic and firms endogenously choose the quality of their products. The model can be brought to the data using random coefficients demand estimation techniques and I infer demand and supply parameters for 7,000 highly disaggregated products. I find that competition and market structure strongly influence the quality decisions of firms. Particularly poor households in the EU benefit from trade, but the effect is overstated by about one third when supply side responses are not taken into account.
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