An equilibrium displacement approach to oligopoly market analysis: An application to trade in the Korean infant formula market

Byeong Il Ahn, Hyunok Lee

Research output: Contribution to journalArticle

6 Citations (Scopus)

Abstract

This article uses an equilibrium displacement model (EDM) to assess the impact of a change in trade policy in the Korean infant formula market that is assumed to be oligopolistic. Domestic oligopolists compete in a market for a homogenous good with importing firms who enjoy the same level of market power as the domestic producers. Within an EDM framework, we investigate how the market adjusts to a new equilibrium in response to an external policy shock that improves access to foreign goods. Our empirical work consists of two steps. We first econometrically estimate the market demand elasticity and market power parameter. Then, using these estimates, we simulate our EDM model to assess the distributional effects of tariff cuts and other changes in marginal cost. Simulation results show that, with a lower market price and increased consumption, the change in consumer surplus resulting from tariff reduction is unambiguously positive, but that the change in social welfare can be in either direction, depending on who receives market rents associated with imports. When importing firms are domestic, the domestic welfare change is definitely positive. However, in the case of foreign importing firms, the direction of the welfare change crucially depends on the demand elasticity.

Original languageEnglish
Pages (from-to)101-109
Number of pages9
JournalAgricultural Economics
Volume41
Issue number2
DOIs
Publication statusPublished - 2010 Mar

Keywords

  • Equilibrium displacement model
  • Infant formula market
  • International trade
  • Market power
  • Oligopoly

ASJC Scopus subject areas

  • Agronomy and Crop Science
  • Economics and Econometrics

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