Effects of domestic market power on implications of reduced trade barriers: Application to Korean dairy

This dissertation analyzes the impacts of imperfect competition in domestic market on the consequences of trade policy changes, focusing especially on the Korean dairy industry. Imperfect competition refers to the oligopoly power by milk marketers in the domestic fluid-milk and processed-milk markets, and the exercise of political influence by raw-milk producers in the domestic raw-milk market. This dissertation mainly focuses on simulating the impacts of tariff cuts under different assumptions about domestic market structure. Market share and price data show that there is reasonable potential of market power in the Korean dairy industry. Therefore, it is worthwhile to explore the potential consequences of imperfect competition on the impacts of trade liberalization.;This dissertation develops an equilibrium displacement trade model for dairy products that incorporates imperfect competition in the domestic market. I simulate the impacts of potential tariff cuts, for example, caused by the Korea and U.S. Free Trade Agreement (KORUS FTA), under alternative assumptions about domestic market structure.;Results of the simulations show that the consequences of trade policy changes for the domestic dairy market differ depending on the market structure of the domestic market, but practical differences are relatively small in the Korean case mainly because of domestic raw-milk pricing rules. Further opening of the processed-milk market increases the welfare of domestic consumers. The welfare impact on domestic marketers does depend importantly on the market structure. When marketers exert oligopoly power in the processed-milk market their gain in welfare from a tariff cuts is larger. When marketers exert oligopoly power in the fluid-milk market they lose from a tariff cuts for imported processed products. The welfare of domestic producers is almost unaffected by tariff cuts under both perfect competition and imperfect competition because the political influence of farmers causes an increase in the raw-milk price when dairy trade is opened.