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

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  • Byeong‐Il Ahn
  • Hyunok Lee

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.

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  • Byeong‐Il Ahn & Hyunok Lee, 2010. "An equilibrium displacement approach to oligopoly market analysis: an application to trade in the Korean infant formula market," Agricultural Economics, International Association of Agricultural Economists, vol. 41(2), pages 101-109, March.
    • Handle: RePEc:bla:agecon:v:41:y:2010:i:2:p:101-109
    DOI: 10.1111/j.1574-0862.2009.00428.x
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    1. Dharmasena, Senarath & Davis, George & Capps, Oral, Jr., 2014. "Partial versus General Equilibrium Calorie and Revenue Effects Associated with a Sugar-Sweetened Beverage Tax," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 39(2), pages 1-17.
    2. Hoque, Mainul Mohammad & Schroeter, John R., 2010. "Agricultural Trade Liberalization and Downstream Market Power: Some Extensions," Staff General Research Papers Archive 31390, Iowa State University, Department of Economics.
    3. Li, Xia & Xie, Chaoping & Grant, Jason & Long, Yanyu & Liu, Yifang, 2020. "China’s Food Security and Its Tariff Rate Quota Reform," 2020 Annual Meeting, July 26-28, Kansas City, Missouri 304639, Agricultural and Applied Economics Association.
    4. repec:uii:journl:v:3:y:2011:i:1:p:77-85 is not listed on IDEAS
    5. Ahn, Byeong-il & Im, Jeong-bin, 2016. "An equilibrium displacement approach to analyzing the effects of tariff reduction on farmers' profits: The Korea-Chile FTA's effects on Korean grape producers," Economics Discussion Papers 2016-10, Kiel Institute for the World Economy (IfW Kiel).
    6. May, Daniel E., 2013. "PR - Export Instability When International Agricultural Markets Operate Under Oligopoly," 19th Congress, Warsaw, Poland, 2013 345682, International Farm Management Association.
    7. Fathi, Fatemeh & Bakhshoodeh, Mohammad, 2021. "Economic and environmental strategies against targeting energy subsidy in Iranian meat market: A game theory approach," Energy Policy, Elsevier, vol. 150(C).

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