MODELING FREE TRADE DEMAND SYSTEM: CASE OF SOUTH KOREAN BEEF MARKET. YOUNG-JAE LEE and P. LYNN KENNEDY

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1 MODELING FREE TRADE DEMAND SYSTEM: CASE OF SOUTH KOREAN BEEF MARKET YOUNG-JAE LEE and P. LYNN KENNEDY Ths study s ntended to see a theoretcal aroach for consumer demand analyss under free trade olcy of mortng country. Free trade demand system was develoed through maxmzng economc welfare of maret artcants. In artcular, recognzng that non-economc factors le mlct dscrmnaton and msnformaton of a artcular roduct mght dstort consumer reference for the roduct, ths study nduced maret demand euatons wth resect to consumer reference to dentfy the margnal effect of change n consumer reference on maret demand. Key words: eef, consumer reference, free trade demand system, and maret demand. Neoclasscal endowment models show that rce dfferences etween mortng and exortng regons rovde oortuntes to ncrease economc welfare through trade (Samuelson 1948; Bhagwat 1964). In mortng artes, most trade enefts come from consumers. Local consumers have ncreased choces wth trade. In contrast, Local roducers face a more comettve maret wth a lower rce than efore trade. Accordng to the eualzaton of factor rces, rces etween mortng and exortng regons wll gradually converge to one rce wth ncreases n maret access where the economc welfare of oth artes wll e maxmzed. However, rce dfferences etween local roducts and morted roducts exst n oen marets. For examle, rce dfferences etween locally roduced eef and morted eef currently exst and are even contnung to grow after South Korea oened the eef maret to the world economy n 001. Ths contnuty of rce dfferences n the oen maret may reflect a consumer reference for locally roduced eef due to well estalshed eatng hats. However, the ncreasng trend of rce dfferences seems unreasonale n the lght of ratonal consumer ehavor and enforced rce cometton derved from trade. In fact, t s true that consumer references can e dstorted y non-economc factors such as merfect nformaton and/or mlct dscrmnaton le uy natonal roduct camagns. Once tastes have een estalshed, consumers ersst n mang unreasonale urchasng decson 1

2 followng the estalshed reference and reure a long tme to recover from these dstorted references. Therefore, these non-economc factors can contrute to the reason why large rce dfferences exst etween locally roduced eef and morted eef and contnue to ncrease followng the leralzaton of South Korean eef maret. In 005, the rce of morted eef was $4.68 er logram n the South Korean eef maret whle the consumer rce of locally roduced eef was $36.11 er logram (exchange rate s 1034 Korean Won/$1, 005), exhtng a 770% rce dfference n 005 whle t was only 190% n 001. Furthermore, concerns exst as to merfect nformaton related to food safety. Even though remedal treatment was mlemented mmedately, the occurrence of mad cow dsease n the Unted State n 003 caused South Korea to dscontnue U.S. eef morts untl 007 when U.S. and South Korea naugurated Free Trade Agreement (FTA). Followng the estalshment of a FTA etween the Unted States and South Korea, agrcultural economsts and olcy maers redct a rosy rosect for U.S. eef roducers ecause the FTA wll eventually elmnate the hgh tarffs for U.S. eef, enalng U.S. eef roducer to e more rce comettve n the South Korean eef maret relatve to other eef sulers. However, even though the South Korean eef maret has een oen snce 001, U.S. eef roducers have not enefted from ncreased maret access. In contrast, the scare resultng from mad cow dsease restrcted U.S. eef from the South Korean maret. It s ratonal to thn that rce advantage of U.S. eef resulted from a FTA wll result n ncreased cometton n the South Korean eef maret. However, the consumton ehavor of the South Korean eef consumer s not totally deendent uon economc factors. Even though the South Korean eef consumer reference can e dstorted y noneconomc factors, eef sulers, ncludng morters and local roducers, consder exstng consumer reference ecause not only rce ut also the estalshed reference wll affect the maret ehavor of South Korean eef consumers. Beef morters and local roducers suly eef nto the maret to maxmze ther economc eneft. Furthermore, oth foregn and domestc eef

3 sulers recognze that local eef consumers see to maxmze ther utlty n consumng eef and consumer utlty s affected y estalshed reference as well as y rce. Jung, et. al. (00) showed that South Korean eef consumers refer locally roduced eef, Hanwoo, to that of lower rced morted eef. Ths study s ntended to develo an oen economc model for analyzng consumer ehavor n the South Korean eef maret gven exstng consumer reference. Furthermore, ths study wll llustrate rce and uantty effects of consumer reference. In order to acheve ths goal, ths study roceeds as follows: In the next secton, a free trade demand system (FTDS) wll e develoed from an economc welfare functon. After develong FTDS, the role of consumer reference wll e dscussed n the thrd secton. In secton four a concluson and ref dscusson of the lmtaton of FTDS model wll e rovded. Free Trade Demand System Economc Welfare Functon We suose that there are fve maor source-dfferentated eef n the South Korean eef maret such as South Korean (SK), Unted State (US), Australan (AU), Canadan (CA), and New Zealand (NZ) eef. As Sarrs and Freearn (1983) llustrated n a oltcal reference functon (PPF) aroach under non-free trade olcy of mortng country, a free trade demand system smly egns wth the lnear demand euaton as follows: (1) A B, 1,,3,4, 5, where we assume that A and B are uncondtonal coeffcents whch can e reverted to nverse maret rce euaton - see Houc (1965 and 1966), Huang (1994 and 1996), and Eales (1996) for more nformaton regardng elastctes and flexltes - as follows:. () a, 1,,3,4, 5, 3

4 where A a and B 1 B. Later, the study wll test ths uncondtonal assumton wth emrcal data. Gven nverse maret rce, the welfare gan of South Korean eef consumer euates to the followng: a 1 (3) CS. Smlarly, the sum of welfare gan of each suler euates to the followng: PS c, (4) where c s the average unt cost of eef ncludng roducton cost, transortaton cost, and tarffs. Snce maret eulrum of rce and uantty s a result of a maret mechansm rather than government nterventon under free trade olcy, economc welfare of maret artcants s the summaton of the welfare gan of oth consumer and suler and s exressed as: EWF (5) a 1 c Free Trade Demand System The economc welfare functon defned n (5) can e rewrtten to more easly derve a free trade demand system as ntended n ths study as follows: (6) EWF 0 1 Q 3 c,. where Q s the sum of eef suled to the South Korean maret. As mled n (6), the free trade demand system s derved from the maxmzng condton of (6). In order to defne the maxmzng condton of (6), we dfferentate EWF wth resect to the fve ndvdual eef rces. EWF (7) 1 Q 3 0. Then, we otan FTDS whch maxmzes the economc welfare of artcants n the South Korean 4

5 eef maret as follows: (8) 1 Q 3,, 1,,3,4,5. where 3 reresents the margnal effect of maret sze on the eef comes from country and reresents own rce effect ( ) and cross rce effect ( ) on the eef. Furthermore, the arameters relatonsh etween (3) and (8) can e defned as followng: (9.1) a, a 1, (9.), and (9.3), 3 ', where ' 1 when and otherwse 0 and 1 when and otherwse 0. To e consstent wth the maxmzaton hyothess of EWF, the second-order condtons of EWF reure that the Hessan matrx e negatve semdefnte at the otmal condtons. Ths condton s exressed as. Also, the Hessan matrx, 3, exhts symmetry. Emrcal Estmaton of FTDS Maret Access and Polces for Beef n South Korea Under South Korean maret access commtment, South Korea hased out non-tarff arrers to eef morts, ncludng state tradng and rce marus, y January 001. Before then, morted eef was under a uota, whch ncreased untl 000, the fnal year. Stee rce marus have een 5

6 elmnated. Before 001, an ncreasng share of the uota was allocated to rvate suergrous, reresentng rvate uyers such as suermarets, restaurants, and hotels. Through the Smultaneous-Buy-Sell (SBS) system, suergrous were free to negotate secfc cuts and ualtes wth foregn exorters. The rest of the uota was admnstered y the Lvestoc Products Maretng Organzaton (LPMO), a state tradng enterrse. The LPMO allocated some morted eef to secal shos lcensed to sell t. As of January 1, 001, eef ecame freely mortale, at a 41. ercent tarff. Secal treatment of morted eef, such as the reurement that t e retaled n shos that dd not also sell domestc eef, was suosed to end. Tale 1 shows the scheduled reducton of tarffs under the URAA reached ts end n 004. Accordng to Unted States and South Korea FTA, South Korea wll elmnate the 41. ercent tarffs through a 15-year straght-lne tarff hase out for all U.S. eef roducts. Data Conventonal demand system analyses of meat consumton data have generally used aggregate annual, uarterly, or monthly tme seres data of urchases and rces at the retal level (Knnucan et al. 1997; Mttelhammer et al. 1996; McGur et al. 1995). The data used n ths study consst of monthly tme seres oservatons from January 1995 to Decemer 004. Ths tme erod was urosefully selected ecause 1) sgnfcant rogress of leralzaton was made n South Korea, ) South Korean eef morts were a lttle dfferent from the scheduled level of mort commtment, reflectng economc nstalty and consumer confdence for consumton of eef durng ths erod, and 3) U.S. eef morts were actually anned after 005 due to a case of mad cow dsease n the Unted States. Related to leralzaton of South Korean eef maret, 1) a SBS system commenced at the egnnng of 1995 and ) on January 001, eef ecame freely mortale, at a 41. ercent tarff wthout any maru ayments. South Korean eef retal rce data are otaned from monthly consumer rce ndex announced y the Korean Statstcal Informaton Servce. The study used the Decemer 004 nomnal rce as a reference rce to transform the ndex nto rce. Because retallevel rces for morted eef were not avalale, morted eef rces were otaned from addng 6

7 tarff and maru ayments to unt value mort rces. The unt value mort rces are otaned from the Korean Customs Servces. Prce data were then converted from South Korean currency, Won, nto U.S. dollars usng monthly average exchange rates from the Federal Reserve Ban of New Yor. South Korean eef consumton data were reorted at the wholesale level and were otaned from Nonghyu. Data on mort uantty were collected from the Korean Customs Servces. The summary of samle statstcs rce and uantty for each source-dfferentated eef s resented n Tale. System Mssecfcaton Tests Fsher asserts that to evaluate any theory usng econometrcs, the theory must e vewed n the context of a vald statstcal model. A vald statstcal model s one whose underlyng assumtons are arorate for the data eng analyzed. If the oserved data rovde statstcal adeuacy, the underlyng relatonshs defned n the economc model can e arorately dentfed. For ths urose, ths study followed the testng strategy roosed y McGur, Drscoll, Alwang, and Huang (1995) to test for euaton-y-euaton mssecfcaton. Euaton-y-euaton tests, as suggested y McGur et al., are used here to test for mssecfcaton of each euaton n the free trade demand system. Even though sngle-euaton tests do not examne mssecfcaton n the contemoraneous covarance etween the resduals of dfferent euatons, such tests can e useful n detectng mssecfcatons and rovdes methods for model resecfcaton when a sngle source of mssecfcaton s dentfed. Normalty, functonal form, heterosedastcty, autocorrelaton and arameter stalty are tested ndvdually and ontly. In the ntal tests wth raw rce and uantty data, the study met serous volatons wth resect to the statstcal rosectve. For examle, Marda s sewness and urtoss test and Henze- Zrler test all reected the null hyothess that the resduals are normally dstruted. The Godfrey Largange multler tests for serally correlated resduals for each euaton were erformed. The null hyothess of Godfrey s test s that the euaton resduals are whte nose. However, the euatons excet for New Zealand eef euaton showed autoregressve errors. The modfed 7

8 Breusch-Pagan tests for homosedastcty showed volatons of the regresson assumton that the varance of the errors s constant across oservatons. The RESET test dd not show the valdty of functonal form. The ntal test results suggested a need for model resecfcaton ecause the mssecfcaton shown n the ntal tests could lead to ased and nconsstent estmators and conseuently narorate nferences and olcy recommendatons. In order to solve the rolems of ased and nconsstent estmators n the resence of mssecfcaton errors and mantan economc consstency of free trade demand system, resecfcaton regmes are followed as 1) extreme outlers were elmnated, ) the data were resorted artrarly, and 3) weghted regresson was used. Followng the recommendatons, the study conducted each of the ndvdual and ont tests. The test results showed how a comrehensve set of mssecfcaton can e reduced. Tale 3 shows the ndvdual test results oth efore and after model resecfcaton. Snce mssecfcaton s not the drect oectve of ths study, we wll not go any further eyond showng the statstcal valdty of the free trade demand system. In addton, as ths study mentoned, ths study allowed for the uncondtonal assumton n euaton (1) and (). In order to do ths, the study estmated rce elastcty coeffcents, Â and Bˆ, of the fve source-dfferentated eef and rce flexlty coeffcents, â and ˆ, of the fve source-dfferentated eef. If exected varances of euaton (1) and () are zero, then the uncondtonal assumton of coeffcents wll e satsfed. However, the null hyothess tests were reected. Estmaton In estmatng the arameters of FTDS model, the model was also mosed wth homogenety and symmetry. Snce the free trade demand system comosed of uantty share euatons for the fve source-dfferentated eef would e sngular, one euaton was droed. The coeffcents of the droed euaton were then calculated from the addng-u restrcton. Dummy varales reflectng 8

9 seasonalty n eef demand were ncluded n the retest estmaton. Although some varales were sgnfcant, they were not ncluded n the fnal verson of the model ecause of small samle sze and the suseuent degrees of freedom rolem. The FTDS model dentfes the effects of own and cross rce and maret sze on maret demand of each source-dfferentated eef at the ont of maxmzng economc welfare for maret artcants. Tale 4 shows the margnal coeffcents of varales of rce and maret sze. Among 0 varales, 17 are sgnfcant at least at conventonal level of sgnfcance. System measure of ft reorted elow the tale. Negatvty was satsfed. For easy nterretaton, ths study converts margnal values nto elastctes. [Place Tale 1 Aroxmately Here] Tale 5 resents the estmated elastctes at the mean of resectve varales. Tale 5 shows own rce elastcty, cross rce elastcty, and maret sze elastcty. As exected, all own rce elastctes are negatve. New Zealand eef s most senstve to own rce, whle South Korean and Australan eef are nsenstve to own rce. For South Korean and New Zealand eef, four source-dfferentated eef are shown to e susttutes. For US eef, South Korean and New Zealand eef are susttutes, whle Australan and Canadan eef are comlementary goods. In artcular, U.S. eef s shown to e strongly susttutale for South Korean eef. For Australan eef, South Korean and New Zealand eef are susttutes, whle U.S and Canadan eef are comlements. For Canadan eef, South Korean and New Zealand eef are susttutes, whle U.S. and Australan eef are comlements. Related to growng maret sze, ths study shows that for a 1% ncrease n South Korean eef maret sze, South Korean eef consumton ncreases y 0.468%, US eef 1.319%, Australan eef 0.568%, Canadan eef 1.688%, and New Zealand eef 1.76% ncreased, resectvely. Ths study also shows that f U.S. eef rce decreases as a result of the free trade agreement etween the U.S. and South Korea (elmnatng hgh tarffs on U.S. eef), the U.S. and South Korea free trade agreement wll rng ostve exectatons for U.S., Australan, and Canadan eef exorts, whle South Korean and New Zealand eef sules are shown to e 9

10 reduced. [Place Tale Aroxmately Here] Role of Consumer Preference n the Free Trade Demand System Accordng to mcroeconomc theory, consumer reference s one of the shftng factors of the demand curve. If South Korean eef consumers have dfferent references for each sourcedfferentated eef, these dfferent references wll affect maret demand for each source - dfferentated eef. In order to examne the role of reference n a free trade demand system, the study smly follows the same route as defned n the revous secton. Whether reference s dstorted or not, the nverse demand rce as defned n () s weghted y the reference recognzed y the South Korean eef consumer as follows: (10) a where, reresents a reference for each source-dfferentated eef and reresents actual maret rce weghted y the reference. In ref, to vsually revew reference weghted nverse rce, see three dfferent cases of references exhted Fgure 1. If the reference s one, then the actual maret rce,, s eual to the true rce,. If the reference s less (greater) than one, mlyng that the reference s underestmated (overestmated), then maret demand wll decrease (ncrease) from to u ( o ) at a constant actual maret rce,. [Place Fgure 1 Aroxmately Here] Wth dfferent consumer references for each source-dfferentated eef, welfare gans to oth consumer and suler and of the gans n economc welfare of maret artcants are redefned as followngs: a 1 (11) CS, 10

11 11 (1) c PS ) (, (13) c a EWF ) ( 1, where CS, PS, and EWF are defned n terms of actual maret rce,, rather than true rce,. Fnally, the reference weghted free trade demand system and arameters are redefned as followngs: (14) Q 3 1, 5, 1,,3,4,, (15) a a, 1, (16), and (17), 3 ', where the Hessan matrx, 3, also shows symmetry and negatvty. Preference Effects on Maret Demand Before develong ths secton, let us revew two cases of the relatonsh etween reference and maret demand. Fgure shows that an ncrease n own reference,, ncreases maret demand of own good from 0 to 1 under gven,,, and. Fgure 3 shows that the mact of cross reference, an ncrease n cross reference,, decreases maret demand of from 1 to 0 gven and. [Place Fgure Aroxmately Here]

12 1 [Place Fgure 3 Aroxmately Here] Now, to measure uanttatvely these own and cross reference macts on maret demand, euaton (14) can e dfferentated wth resect to and. Then, own reference and cross reference dfferental euatons are defned as follows: (18) Q A, 3, (19) Q B,. where a a A ) (, and a B,. To e consstent wth reference theory, own (cross) reference frst dervatve should e greater (less) than zero. However, oth (18) and (19) are amguous as to determne the emrcal sgn of frst dervatve of and ecause f one of the references s extremely low own (cross) reference effect wll e negatve (ostve). Even though oth (18) and (19) can not gloally show the clear mact of reference on maret demand, oth euatons can e used to locally determne the emrcal mact of reference on maret demand y normalzng reference and y usng arameters estmated y econometrc method, â and ˆ. Snce we now actual maret rce and uantty of maret consumton for each source-dfferentated eef, we can determne the sgn of own reference and cross reference n those euatons wth â and ˆ. Euaton (18) and (19) can also e used to comare reference macts on maret demand n a varety of maret szes and maret rces wth euaton (14). Smulaton Results In order to smulate the South Korean eef model, ths study estmated arameters, â and ˆ,

13 usng the same data set used n the revous secton. Tale 6 shows the statstcal nformaton of â and ˆ all of whch are statstcally sgnfcant at the 1% level. The statstcs show that the sgn of eef rces of South Korea, U.S., Canada, and New Zealand are negatve as we exected whle the eef rce of Australa s ostve. After arameter estmaton, ths study relaced â and ˆ for a and n (18) and (19) to confrm emrcal sgn of change n consumer reference. [Place Tale 3 Aroxmately Here] Tale 7 shows the macts of changes n consumer references wth and wthout changes n maret sze and actual maret rces. The sgn of euaton (18), whch reresents own reference effect n emrcal analyss, s shown to e ostve for eef of South Korea, U.S., and New Zealand whle the emrcal sgn of (18) s shown to e negatve for Australan and Canadan eef. Related to cross reference effect, the emrcal sgn of euaton (19) s shown to e dfferent deendng on whch reference s changed. Increases n reference for South Korean eef have a negatve mact on U.S. and New Zealand eef demand. Increases n reference for U.S, Canadan, and New Zealand eef decrease South Korean eef demand, whle ncreases n reference for Australan eef smultaneously ncrease South Korean and U.S. eef demand. Tale 7 also shows that the effect of change n consumer reference on maret demand wth changes n maret sze and actual maret rces. When we comare Case 1 and Case, Canadan eef maret demand s changed from a negatve relatonsh wth changes n South Korean eef consumer reference for U.S. eef and New Zealand eef to a ostve relatonsh. When we comare Case 1 and Case 3, changes n actual maret rces of morted eef roduced dfferent results from ndeendent effect of change n consumer reference. In case 3, an ncrease n South Korean eef consumer reference for U.S. eef wll change maret demand for Canadan eef from negatve to ostve. An ncrease n reference for Australan eef wll change own reference effect for Australan eef from negatve to ostve. Also, an ncrease n reference for Canadan eef wll change maret demand for South Korean eef from negatve to ostve and maret demand for Australan and New Zealand eef 13

14 from ostve to negatve. In case 4, an ncrease n reference for U.S. eef wll change maret demand for Canadan eef from negatve to ostve. An ncrease n reference for Australan eef wll change maret demand for own eef from negatve to ostve. Fnally, an ncrease n reference for Canadan eef wll change maret demand for South Korean eef from negatve to ostve and maret demand for New Zealand eef from ostve to negatve. If consumer reference for morted eef and maret volume ncreases, maret demand for not only morted eef ut also locally roduced eef ncreases. Maret demand for South Korean eef wth an ncrease n maret volume and reference for morted eef s ncreased more than wthout ncrease n maret volume and reference for morted eef. In artcular, the decreasng rate of maret demand for Australan and Canadan eef s reduced wth an ncrease n maret volume. If rces of morted eef ncrease, maret demand for South Korean eef s ncreased more than wthout an ncrease n rces of morted eef and maret demand for U.S. and New Zealand eef s ncreased less than wthout an ncrease n rces of morted eef. Wth an ncrease n rces of morted eef, maret demand for Australan eef s ncreased even though an ncrease n reference for Australan eef wthout an ncrease n rces of morted eef decreases maret demand for Australan eef. Maret demand for Canadan eef wth an ncrease n rces of morted eef s shown to decrease at a decreasng rate. The mact of decrease n rce of South Korean eef shows lttle mact on maret demand for morted eef. [Place Tale 4 Aroxmately Here] Concluson Recognzng the osslty of dstorton for consumer reference for foregn sourced eef n the South Korean maret, ths study develoed a free trade demand model to analyze South Korean eef consumer ehavor. Ths research goal was acheved y two dfferent stes. In the frst ste, ths study dentfed the maxmum condton of the economc welfare functon n whch maret artcants maxmze ther economc eneft from trade and derved free trade demand system 14

15 wthout consderng exstng South Korean eef consumer reference. In the second ste, ths study analyzed reference effects on maret demand of each source dfferentated eef usng the free trade demand model weghted wth consumer reference. In dong these efforts, ths study met serous statstcal rolems n erformng emrcal estmaton under the FTDS frame. In order to solve the rolems of ased and nconsstent estmators n the resence of mssecfcaton errors and mantan economc consstency of FTDS, ths study resecfed the model followng as 1) extreme outlers were elmnated, ) the data were resorted artrarly, and 3) weghted regresson was used. Followng these recommendatons shows statstcal valdty of FTDS model. The emrcal results of FTDS model showed that South Korean eef consumers are shown to e negatve ut not senstve to change n own rce of each source-dfferentated eef excet for New Zealand eef. For South Korean eef, all four foregn sourced eef are shown to e susttutes. In artcular, U.S, eef s shown to e the strongest susttutale good for South Korean eef. Wth ncreasng maret sze, Canadan eef and U.S. eef can easly extend ther South Korean maret share relatve to other foregn sources for eef. Related to the role of consumer reference, the results showed that U.S. eef can extend ther maret share wth ncreasng South Korean eef consumer reference for U.S. eef. In artcular, ths result mght reflect the decrease of U.S. eef consumton after 003 when mad cow dsease was reorted n the U.S. The most nterestng fndng related to reference analyss s that an ncrease n the rces of foregn sourced eef does not negatvely affect maret demand for ths foregn sourced eef f reference for foregn sourced eef and/or maret sze ncreases and a decrease n South Korean eef rce s shown not to affect maret demand for foregn sourced eef. As a result, ths study suggests that maretng strategy should e focused on ncreasng consumer reference for the U.S. eef y rovdng correct nformaton aout the roduct and on reducng dstorton of reference n order to fully succeed n the South Korean eef maret. 15

16 Tale 1. Leralzaton Schedule for South Korean Beef Maret Year Quota 1/ Tarff Maru Tarff + Maru SBS Percent Aolton 40.8 Aolton 40.8 Aolton 00 Aolton 40.4 Aolton 40.4 Aolton 003 Aolton 40.0 Aolton 40.0 Aolton 004 Aolton 40.0 Aolton 40.0 Aolton 005 Aolton 40.0 Aolton 40.0 Aolton 006 Aolton 40.0 Aolton 40.0 Aolton 007 Aolton 40.0 Aolton 40.0 Aolton Source: USDA (Unted States Deartment of Agrculture), Unt: 1000g 16

17 Tale. Summary Statstcs for Prce and Quantty of Each Source Dfferentated Beef, Mean SD Mnmum Maxmum SKBQ USBQ AUBQ CABQ NZBQ SKBP USBP AUBP CABP NZBP Sources: KCS, KOSIS, and Nonghyu SKBQ: South Korean Beef Consumton USBQ: U.S. Beef Consumton AUBQ: Australan Beef Consumton CABQ: Canadan Beef Consumton NZBQ: New Zealand Beef Consumton SKBP: South Korean Beef Prce USBP: U.S. Beef Prce AUBP: Australan Beef Prce CABP: Canadan Beef Prce NZBP: New Zealand Beef Prce 17

18 Tale 3. Free Trade Demand System: -values for Euaton-y-Euaton Mssecfcaton Tests s us au ca nz Before Model Resecfcaton Normalty <.0001 <.0001 Functonal Form 0.01 < <.0001 Heterosedastcty <.0001 < <.0001 Autocorrelaton <.0001 < < Parameter Stalty <.0001 < < After Model Resecfcaton Normalty Functonal Form < Heterosedastcty Autocorrelaton Parameter Stalty s a sngle euaton for eef sourced from country. SK: South Korea, US : Unted States, AU : Australa, CA : Canada, and NZ : New Zealand. 18

19 Tale 4. Estmated Margnal Coeffcents of Prces n Free Trade Demand System ˆ Qˆ ˆ 3s ˆ 3us ˆ 3au ˆ 3ca 3nz s -697*** 353*** 17*** 13 04*** 0.58*** us -1574*** -66** *** 0.50*** au *** 1356*** 0.04** ca -98* 571*** 0.07*** nz -4070*** 0.099*** * ndcates sgnfcance at 1% level ** ndcates sgnfcance at 5% level *** ndcates sgnfcance at 10% level System Weghted R =0.99 ˆ 3 s an estmated margnal coeffcent of rce of eef sourced from country. Qˆ s an estmated margnal coeffcent of total uantty suled nto South Korean eef maret. 19

20 Tale 5. Prce and Quantty Elastctes at Mean Values s s us au ca nz Q us au ca nz s rce of eef sourced from country. Q s total uantty of eef suled nto South Korean eef maret. 0

21 Tale 6. Statstcal Informaton of Estmated Parameters, â and ˆ. â S.E. t-value ˆ S.E. t-value s * * * * us * * au * * ca.3874* * nz In order to estmate arameters, ths study used system euaton model ecause error terms are smultaneously correlated at tme t. * reresents statstcal sgnfcance at 1% level. 1

22 Tale 7. Imacts of changes n consumer reference wth/wthout changes n maret sze and maret rces Case 1: Indeendent Effect of Consumer Preference ˆ s ˆ us ˆ au ˆ ca ˆ nz s us au ca nz Case : Jont Effect of Consumer Preference wth an Increase n Maret Sze ˆ s ˆ us ˆ au ˆ ca ˆ nz s us au ca nz Case 3: Jont Effect of Consumer Preference wth an Increase n Maret Sze and Prces ˆ s ˆ us ˆ au ˆ ca ˆ nz s us au ca nz Case 4: Jon Effect of Consumer Preference wth an Increase n Maret Sze and Prces of Imorted Beef and a Decrease n South Korean Beef Prce ˆ s ˆ us ˆ au ˆ ca nz s us au ca nz ˆ s consumer reference for eef sourced from country. ˆ

23 Π γ a > a a γ > 1 γ = 1 γ < 1 γ a < a Π u 0 a / Fgure 1. Relatonsh Between Consumer Preference and Maret Demand 3

24 Π Π 0 1 Π Π Fgure. Relatonsh Between Consumer Preference for Own Good and Maret Demand 4

25 Π Π 1 0 Π Fgure 3. Relatonsh Between Consumer Preference for Cross Good and Maret Demand Π 5

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