Estimating the Demand Function for Residential City Gas in South Korea: Findings from a Price Sensitivity Measurement Experiment

Abstract

The main cooking and heating fuel in the urban area of South Korea is city gas (CG), whose main ingredient is natural gas. A total of 34 operators in the country supply residential CG (RCG) in the form of a regional monopoly. Both the government and the operators need information on the demand function for RCG to establish policies and business plans. In response to this need, this article empirically estimates the demand function for RCG. There are two difficulties in securing data necessary for this estimation. First, since all RCG operators are private and most past performance data are trade secrets, the data required for the estimation are not usually available. Second, the prices of RCG are strongly controlled by local governments and price management authorities rather than determined in the marketplace. To overcome these two difficulties, this study applied the price sensitivity measurement experiment and a survey on RCG demand was conducted with 886 households nationwide. More specifically, each household was asked about current RCG usage and rates and then how they would adjust demand for the four alternative rising RCG prices. Therefore, a total of five observations were obtained for each household. The total number of observations used in this study was 4430. The estimated demand function for RCG held statistical significance. In addition, the price and income elasticities of demand were obtained as −0.570 and 0.038, respectively, securing statistical significance. The demand for RCG was inelastic to both price change and income change. This information can be useful in various fields of policymaking related to RCG.