Demand System Analysis of the South Korean Beef Market with the Free Trade Demand Model

In this study a demand system analysis for beef in South Korea is constructed. A free trade demand system was used in which the economic welfare of market participants are maximized. Recognizing implicit discrimination about non-locally sourced beef products, this study deduces market demand equations with respect to consumer preference in order to identify the marginal effect of change consumer preference has on market demand. Introduction Neoclassical endowment models show that price differences between importing and exporting regions provide opportunities to increase economic welfare through trade (Samuelson 1948; Bhagwati 1964). For importing parties, most trade benefits accrue to consumers as local consumers have increased choice with trade. In contrast, local producers face a more competitive market with a lower price than before the institution of trade liberalization. According to the equalization of factor prices, prices between importing and exporting regions will gradually converge into one price with increased market access where the economic welfare of both parties is maximized. However, a price difference between local and imported products does exist in open markets. For example, price differences between locally produced beef and imported beef currently exist and have continued to grow after South Korea opened their beef market to the world economy in 2001. These price differences in the open market may reflect consumer preference for locally produced beef. However, the increasing trend of price differences seems to be unexpected in light of rational consumer behavior and enforced price competition derived from trade theory. In fact, it is true that consumer preference can be distorted by non-economic factors such as imperfect information and/or implicit discrimination like nationalistic “buy domestic product” campaigns. Once tastes have been established, consumers persist in making purchasing decision