Abstract
The presence of state-owned enterprises (SOEs) in an industry where private firms operate poses a concern over fair competition. This paper estimates the improvement in consumer welfare from eliminating the SOE’s privileges awarded by state-ownership and regulation. The empirical framework is based on a random coefficient discrete choice model and yields an economically interpretable welfare measure in a differentiated product market. Utilizing data on the Korean cigarette manufacturing industry that recently underwent privatization and deregulation, the estimated model shows a significant increase in consumer surplus. This improvement is ascribed to firms’ better alignment of product lines with consumer preferences, to expanded consumer choice, and to a limited rise in prices. The results, however, raise a distributional concern as the gains mostly fall on consumers of mid- and high-price brands.
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Notes
According to the recently collected OECD data (Kowalski et al. 2013), 204 of the world 2,000 largest companies have been identified as state-owned enterprises in years 2010 and 2011, with the combined sales amounting to 6 % of world GDP.
Recent studies argue that even rational smokers may act against the long-term self-interest. See Gruber and Koszegi (2001), for example.
Almost all tobacco products are consumed in cigarettes and the other forms of tobacco products are negligible.
Tobacco Business Act (Act No. 6078, Dec. 31, 1999), Chapter III, Article 11.
Tobacco Business Act (Act No. 6460, Apr. 7, 2001), Chapter III, Article 11-(2).
See Min (2011) for a model that includes non-smoking in the choice set.
The 2003 annual report of KT&G states, “We will continue to introduce differentiated brands that offer high profit margins and meet consumer demand for high quality products. Moreover, the restructuring of our product portfolio to focus on strategic brands will include the gradual phasing out of non-profitable brands. (...) Furthermore, we will be responsive to market demands, and continue to develop brands that meet consumers’ increasing preference for low-tar and slim-type cigarettes.”
Enforcement Decree of the National Health Promotion Act (Decree No. 15732, Feb. 28, 1998), Article 14-(1).
I also run a specification where other firms’ profits are included in the objective and get similar results.
I do not use \(\sum _{l\in F_{f},l\ne j} nb_l\) and \(\sum _{l\not \in F_{f}} nb_l\) as instruments because of multi-collinearity. \(q\), another cost driver, is not used as an instrument because it is an endogenous variable.
A standard pack holds 20 cigarettes.
The manufacturers consistently associate low-tar and slimmer products with “premium” brands (KT&G 2003). Also, low-tar and slim products are on average more expensive.
Cigarette prices in Korea are sticky even these days when this paper is written. Foreign makers only recently begin to experiment on repricing products for reasons other than the change in tax rates. They raised the prices of core products in 2011 but reversed the change next year for the ensuing sharp decrease in demand.
The calculation of confidence intervals follow parametric bootstrapping as in Nevo (2001), where I take a draw from the estimated distribution of the model parameters and calculate the surplus function, and repeat the process 1,000 times to take the 5th percentile and the 95th percentile.
Recent developments in the literature suggests further options to a researcher. Ackerberg and Rysman (2005) present a model where the space of unobserved characteristics becomes crowded as more products are added. Berry and Pakes (2007) give a discrete choice model without the logit error and an estimation algorithm. However, with a limited number of markets, it is hard to apply more sophisticated models.
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Acknowledgments
This research was supported by Hankuk University of Foreign Studies Research Fund. An earlier version of this paper was presented at the 2013 Summer Conference of the Korea Academic Society of Industrial Organization under the title “Quantifying consumer benets in a privatized industry.” I thank the editor and two anonymous referees for their valuable comments and suggestions. The usual disclaimer applies.
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Min, H. Consumer benefits of reforming a state-dominated industry. J Regul Econ 47, 58–77 (2015). https://doi.org/10.1007/s11149-014-9262-y
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DOI: https://doi.org/10.1007/s11149-014-9262-y