Consumer benefits of reforming a state-dominated industry

Abstract

The presence of state-owned enterprises (SOEs) in an industry where private firms operate poses a concern over fair competition. This paper estimates the improvement in consumer welfare from eliminating the SOE’s privileges awarded by state-ownership and regulation. The empirical framework is based on a random coefficient discrete choice model and yields an economically interpretable welfare measure in a differentiated product market. Utilizing data on the Korean cigarette manufacturing industry that recently underwent privatization and deregulation, the estimated model shows a significant increase in consumer surplus. This improvement is ascribed to firms’ better alignment of product lines with consumer preferences, to expanded consumer choice, and to a limited rise in prices. The results, however, raise a distributional concern as the gains mostly fall on consumers of mid- and high-price brands.