Fair Trade Commission to Regulate “Appropriate” Profit
by Brendon Carr
Apparently not content trying to control the price of housing, the Roh administration also intends to reserve to the government the power to control prices across the economy. Today I noticed this item in the Dong-A Ilbo’s English edition, reporting that from November the Fair Trade Commission will implement a revision of the Monopoly Regulation and Fair Trade Act (MRFTA) defining two new kinds of market abuses by dominant players: “[P]roduct prices that are excessively higher than supply costs, and product prices or margin of profits that are excessively higher than those of other companies in the same industry”.
Yikes. This is pretty intriguing economic theory, and could hit a lot of foreign companies pretty hard. For example, a certain foreign software company has maintained—and even raised—the price of its market-dominating operating system while the price of all other computer components have fallen through the floor. Could not this software maker be said to enjoy a profit margin higher than those of other companies in the same industry?
There is a foreign consumer-electronics company whose portable media players and personal computers enjoy profit margins that are well above the equivalent margins that its Korean competitors—whose shabby design and lack of purchasing power impair their margins—cannot match. Yet this consumer-electronics company’s products are priced lower than the “equivalent” products of the Korean competitors, which raises an interesting question about remedy: If the foreign consumer-electronics maker is ordered to cut prices to match the margins the Korean competitors get, it would accelerate the speed with which the Korean companies are being driven out of the market. So what to do? Market quotas?
KFTC can be very creative in its market definitions, too. Luxury carmakers are currently under investigation for their practices dominating the market for “cars priced over W100 million”. What’s that you say? There are no Korean carmakers offering cars priced over W100 million? So only foreign imported carmakers, who collectively have less than 2% of the overall Korean auto market, are accused of market dominance? Go figure.
I’m all for an effective Fair Trade Commission enforcing laws against bona fide market abuse—namely, the cartels that plague the Korean economy—but setting “appropriate” profit rates based on supply costs seems like a quest for equality of outcome and punishment of innovation and success. It makes me hanker for a fresh, hot Wendy’s cheeseburger:
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Another excellent post Brendon, thank you. I have 2 cents to add:
1st cent - The KFTC was not established to actually break up monopolies but as another government tool to manage the economy that adopted the form of advanced countries’ anti-trust policies. EG, it focuses regulations on the 30 largest companies in Korea rather than on monopolies in individual markets. These 30 companies are told to do this and that, but the Hyundai monopoly in the automobile market is never challenged. (Because Hyundai is considered a national champion, a pillar of economic growth, it is excused for charging more for cars in Korea than in the USA. Similar logic in the Hyundai CEO trial). Bottom line: Korea isnt a market economy and they try to correct the problems associated with market intervention with more market intervention (instead of adopting free-market policies).
2nd cent - As for going after foreign companies, didn’t Korea hit the jackpot when it landed that anti-trust decision against Microsoft? I suspect the politicians see it as a win-win: free money from foreigners and helping out domestic industries. As we both know, the KFTC would never attack the monopoly of a domestic company which is sufficiently friendly and munificient to ruling politicians.