The Korean Economic Review
Reform in a Differentiated-Product Industry: The Case of the Korean Cigarette Manufacturing
Heechul Min (Hansung University)Year 2011Vol. 27No. 1
This paper explores the ramifications of privatization and deregulation in adifferentiated-product industry. The analysis focuses on the change in firms’ productportfolio and pricing policy. Using product-level data on the Korean cigarettemanufacturing industry, which underwent major reform recently, a random-coefficientdiscrete choice model is estimated to approximate substitution patterns among cigaretteproducts. The findings are as follows. First, in the post-reform period, new products aresignificantly less price-elastic than existing ones; however, no such relationship is found inthe pre-reform period. Second, data in the pre-reform period is not consistent with firm-levelprofit maximization mainly due to the failure to internalize within-firm substitution. In thepost-reform period, however, partial evidence supports the view that pricing of new productsis compatible with firm-level profit maximization. Overall, the analysis suggests that firmefficiency improves in the post-reform period through the introduction of profitable productsand the proper pricing of these products.