Most everyone knows I am a big fan of free-market economics. Normally I would reject anything looking like price controls out of hand. So I approach the discussed recent moves for the Korean Fair Trade commission to more rigorously control prices with trepidation.
So has the Federation of Korean Industries, whose criticism forms the basis of the article linked above. Now I was in full agreement, until I heard these statements from an unnamed FKI spokesperson and the FKI’s executive director Hwang In-Hak:
“The revision gives the government direct control of prices,” the federation said. “It goes against market principles. It is a return to the 1970s, when the government controlled prices to meet inflation targets.”
The federation also said the regulation will discourage companies from making efforts to improve efficiency. “If product prices are regulated on the basis of costs, companies will not develop technologies to cut costs,” said Hwang In-hak, executive director of the federation.
Now as far as a pure economics textbook read of things, they are arguably right. However I has a coffee-shot-out-of-my-nose moment towards the end. Let’s look at the line from executive director Hwang closely:
“If product prices are regulated on the basis of costs, companies will not develop technologies to cut costs,”
Again, textbook-wise Mr. Hwang is dead on, however is this the case in Korea? Is Korea a competitive market? Are Korean companies dedicated to improve efficiency? Let’s take a very brief tour of some of the news in just the last year:
The nation’s antitrust watchdog fined four leading local oil refiners a total of 52.6 billion won ($56 million) for fixing the prices of their oil products in 2004. - Joongang Ilbo, Febuary 23, 2007
Korea’s antitrust watchdog has launched an investigation of local major Internet portal operators on suspicion of involvement in price fixing and other unfair business practices, industry sources said yesterday.- Joongang Ilbo, May 10, 2007
The Fair Trade Commission said yesterday in a release that it fined 10 local casualty insurance companies a total of 50.8 billion won ($54.6 million) for colluding to set the insurance premium rate for eight major products between 2002 and 2006. - Joongang Ilbo, June 15, 2007
[An] association of 97 charter bus operators [North Gyeongsang Province] in the province met in January and February to set prices as competition drove down their revenue and oil prices increased. They selected county and city representatives and set and agreed to keep minimum fees… They agreed on prices for set regions and decided which members would operate in which areas of the province. - Joongang Ilbo, June 11, 2007
In Busan, a group of 10 computer parlors gathered and set minimum fees in a meeting in December 2005. They decided to charge 1,000 won for the first hour. The meeting came after some PC rooms began charging 500 won for the first hour. - Joongang Ilbo, June 11, 2007
Seven companies have been fined by the Fair Trade Commission for fixing prices on a project bid, the commission said yesterday…A fine of 786.8 million won ($850,000) total was levied on the companies. Hyundai Heavy Industries, LS Industrial Systems (formerly LG Industrial Systems), Hyosung, Kwang Myung Electric, Seondo Electric and Iljin Electric will have to pay 124.9 million won each, while ABB Korea was fined 37.4 million won by the commission. - Joongang Ilbo, May 28, 2007The Fair Trade Commission said yesterday it has ordered corrective measures by GM Daewoo Auto & Technology Co., the country’s third-largest automaker, for coercing supply dealers into fixing the prices of bumpers. - Joongang Ilbo, August 3, 2007
Korean Air was fined $300 million on Thursday after admitting to price-fixing with rivals on international passenger and cargo flights. - Joongang Ilbo, August 25, 2007
The Fair Trade Commission said yesterday it is investigating about 10 local and foreign pharmaceutical companies for alleged unfair practices, including rebate offers to hospitals. - Joongang Ilbo, January 30, 3007
A Korean court yesterday ordered five local oil refiners to pay back the government 81 billion won ($86 million) for jointly rigging the prices of oil sold to the military. - Joongang Ilbo, January 24, 2007
Korea’s Fair Trade Commission imposed a fine of 4.6 billion won ($4.9 million) on four local confectionery makers — Lotte Confectionery Co., Lotte Samkang Co., Haitai Confectionery & Foods Co., and Binggrae Co. — for price collusion on their major ice cream products. - Joongang Ilbo, March 19, 2007
You know, it seems to me that Korea ALREADY has many price controls. I think the real fight here is “Who has the power to fix prices in Korea and screw consumers? Companies? The Government?”
Is there anyway to have BOTH sides lose on this one?
10 Comments
Are they dedicated to improv(ing) efficieny’s what?
I’d say both sides ARE already loose.
Dogbertt> Thanks for the sharp eyes. I tried a different program to write this post, and it did not turn out well. I wish the Marmot would get Mac friendly blogging tools.
While they’re at it, how about rent control? I want the right to live in a shabby, ill-maintained but cheap abode that is falling down around me.
And then let’s look at the effect of a fixed price:cost ratio. What do you want to bet costs start to ease up as execs see no need to be stingy on overseas golf junkets or room salon outings? Holy unintended consequences, Batman!
I wrote about this move of the Korea Fair Trade Commission on September 9 over at my Korea Law Blog. All in all, I’m glad to see the KFTC actively working to uncover the cartels and price-fixing schemes you enumerate above, Dram, but I share your disgust at the idea the government ought to be watching against profit-taking. The profit motive is the prime mover behind improvements in the standard of living.
During a course on Korean economics in college, the instructor mentioned that Korea isn’t a capitalist economy but an economy that is a mix of communist central planning and capitalism. That was on 1998, one year after the so called IMF crisis.
I guess old habits die hard.
Nice to have you back in action, Dram_man.
I’ve no time at the moment to get into the debate on whether cartels are as evil as they first appear, but for the interested, this is my favorite paper on South Korea’s (unique-ish) development model. I think it explains quite well what mins0306’s professor was talking about.
http://papers.ssrn.com/sol3/pa....._id=731036
Ah, but I’ll share this little anecdote I just remembered: Some years ago I knew a mid-level manager for one of the makers of large construction equipment in Korea. He was in charge of sales for a certain area. He told me one day he was going to have lunch with his counterpart at one of the two other makers of such equipment. Huh? I said. Why would you do that? He said the two of them get together every few months and talk about “things”, that they shared with each other a lot of info about their sales activities, and that it was mutually beneficial, since they were oligopolistic suppliers dealing with oligopolistic customers.
Just to show it’s not all about billionaires getting together and cutting huge deals now and then. It’s how regular biz is done even at the 차장 level, for just a dumptruck or two.
In addition to what Linkd has commented, Korean organizations also routinely pass on to their favored bidders, the quotations of the other bidders, so the favored ones would know how the cards are stacked before a bidding process.
Another case of how regular biz is done here.
#8: I have had such bids in my hands numerous times while engaged in a previous occupation, which I will not elaborate on here. It was mainly for the reason that they would rather do business with my company vs. the French, whom they really didn’t like to business with.
Yes, the free market is an illusion here.
Regardless of “how business is done” the fact is that for whatever reason — whether it’s because of a real commitment to change, or for window-dressing to appear as an “advanced economy” — Korea has a competition law (the Monopoly Regulation and Fair Trade Act) which makes cartel behavior unlawful. Enforcement of that law gladdens the heart.