Consumer Responses to Price Shocks of Wine Imports in Korea

The main purpose of the study is to develop a methodology that divides consumers’ responses to free trade agreements (FTAs) or commodity taxes into quantitative and qualitative margins, which cause exogenous price changes for certain specific goods. Unlike the usual method of using unit values as a proxy variable for market prices, the use of unit values as a dependent variable for consumers’ qualitative choice showed that qualitative responses to price changes exist, and their size is significant. The methodology of separating and estimating qualitative responses to income changes as in economic crises revealed that many of the existing income effects are qualitative responses. As a key result, the price elasticity of −1.178 estimated by the usual demand model based on a single commodity assumption was reduced to −0.712 for the quantitative margin only, and the qualitative margin was the remaining −0.466, which accounted for more than a third of the overall response. The significant degree of qualitative response estimates suggests that policy makers and researchers should consider qualitative response as an important factor when analyzing the effectiveness of FTAs, especially in consumption.