This article studies the Korean soju industry and investigates the sources of its persistent brand loyalty. The soju industry was heavily regulated up to the early 1990s. During the 1970s in particular the government designated only one soju firm in each regional market and further required local distributors to purchase more than 50 percent of their soju from the designated local firm in each regional market. However, even after this mandatory local soju purchase policy was abolished, local consumers tended to purchase local brands, a trend that continues to this day. To explain the persistence of brand loyalty, we propose an identity-based theory and provide empirical evidence consistent with the theoretical implications of the local identity theory.
Local identity, brand loyalty, market share, soju industry, political economy
A large body of empirical research in both economics and marketing has documented that consumers tend to purchase the same product that they have purchased in the past. Several strands of theoretical literature have thus proposed various mechanisms through which past experiences may determine current willingness to pay for brands. However, the main difficulty in empirical testing is that past purchases were not exogenously given. To address this difficulty, this article considers a rare natural experiment that took place in the Korean soju industry, in which the government designated only one firm in each regional market and obliged consumers in each market to purchase local brands. We found that local consumers tended to purchase local brands even after this mandatory local soju purchase policy was abolished. To explain the persistent leadership of local soju firms in their markets, we further propose an identity-based story and provide empirical evidence supporting this theory.
Soju is the most popular traditional alcoholic beverage in Korea. The soju industry in Korea is currently structured with ten firms and ten regional markets. Each firm is dominant in its regional market. However, this industry structure did not arise naturally, but was instead established by regulations, particularly during the 1970s.
Most notably, in 1973, the Korean government forcibly consolidated various local soju producers and designated only one firm as the local soju producer in each regional market. In addition, the government restricted licenses to produce soju, and required soju producers to notify the National Tax Service before they increased prices. More importantly, the government introduced two policies to further regulate the industry during the 1970s. The first is the "mandatory local soju purchase policy," which required distributors in each regional market to purchase more than 50% of their soju from the designated firm in each market. The other is the "input allocation policy" which allocated alcohol to soju companies based on their national market shares in the previous year (nearly all contemporary soju is made by diluting previously purchased pure alcohol with water, and then adding flavorings). These policies were intended to protect local firms and discourage excessive competition, but they also obliged consumers in each regional market to purchase local brands. As a result, the locally designated firms became dominant in their regional markets.
However, a trade liberalization trend in the late 1980s led the Korean government to begin deregulating several industries, including the soju industry. Deregulation in the soju industry during the early 1990s included the following changes. First, the government lifted restrictions on new licenses for alcohol distribution in January 1991 and similarly for soju production in March 1993. Second, various restrictions on the production of soju were removed or weakened. Third, the government gradually changed the mandatory local soju purchase policy …