The Tax Incidence and Discriminatory Pricing in the Korean Soju Market

This dissertation is inspired by detailed data on a vertical industry. Data pertaining to Korean soju, a vodka-like spirit, provides information regarding upstream manufacturer shipments and downstream retail sales. Manufacturer shipment prices are determined by a uniform price constraint that restricts manufacturers to a single list price for soju shipped to multiple regions. The Korean government levies an ad valorem sales tax on liquor manufacturers. A major tax rate increase took effect on January 1, 2000 due to a trade dispute between the Korean government and the European Communities.;Using the actual change in tax rate in 2000, the first chapter investigates the relationship between tax incidence and market dominance in a differentiated product market. Demand is estimated from product-level data for regional retail markets. A vertical industry model is constructed with oligopolistic competition among the manufacturers and perfect competition on the retail side. Using the data after the tax increase, a counterfactual price equilibrium is simulated at the low tax rate. By examining the shift of price equilibria, we find that soju manufacturers bear slightly more tax burden than consumers, on average. However, tax incidence exhibits regional variation, mainly by market concentration rate, in that the more concentrated market is associated with a greater tax burden on the manufacturer side.;Chapter 2 eliminates the uniform pricing constraint to investigate the welfare effect of permitting regional price discrimination. Using demand and cost estimates from Chapter 1, this chapter simulates the counterfactual market outcomes under price discrimination and compares them with current market data. The empirical results show price discrimination tends to intensify price competition in most regions. The welfare tradeoff is observed in consumer surplus across regions and in profit across manufacturers. Consumers are likely to be better off in all regions except Seoul, Gyunggi, and Gangwon. National manufacturers Jinro and Lotte earn more profit by expanding their shares of non-home-region markets. The government may expect a national welfare gain from price discrimination consequent to the gain from consumer surplus.