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 FTAs or commodity taxes into quantitative and qualitative margins, which cause exogenous price changes for some specific goods. The use of unit values as a dependent variable for consumers' qualitative choice, unlike the usual method of utilization of unit values as a proxy variable for market prices, showed that qualitative response to price changes exists and its size is significant. The methodology of separating and estimating qualitative responses to income changes as in economic crises is also presented, and the empirical analysis using this methodology showed that much of the existing income effects were qualitative responses. As a key result, the price elasticity of -1.178 estimated by the usual demand model based on a single commodity assumption is reduced to -0.712 for the quantitative margin only, and the qualitative margin is the remaining -0.466, accounting 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 on consumption.