Editor’s note:

The below articles describes a new antitrust rule that the Fair Trade Commission is trying to enact and the strong objection coming from business community. The newspaper article is followed by an editorial of the same paper criticizing the new planned rule of the Fair Trade Commission.

Source: Joong-ang Daily News; October 4, 2007

The Federation of Korean Industries, the nation’s main business lobby group, issued a statement yesterday criticizing the Fair Trade Commission’s plan to tighten price regulations on market-dominant companies for being “anti-market.”

The antitrust agency responded with a statement to refute the criticism, saying that the regulations will be applied only to those who abuse their market dominance. The Fair Trade Commission said early last month it would revise its antitrust law’s enforcement ordinances, so that it could regulate a market-dominant company’s product prices if they were “significantly high” relative to the company’s costs or the average prices charged by other firms in the same industry.

When a single company has at least a 50-percent market share, or when three companies have a 75-percent or more combined market share, they are regarded as market-dominant companies. “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. The lobbyists also said the revision goes against deregulation and globalization. Such price regulation is not found in the United States or Japan and in only a few cases in the European Union, it added.

The federation also said the ambiguous standards for “significantly high” prices would increase the antitrust agency’s authority and cause uncertainty among businesses. The Fair Trade Commission responded with a statement that said, “The regulation will be applied only to abuses by monopolistic companies. We will clarify it by adding the provision that the regulation will only be applied in markets without actual competition due to institutional or physical barriers.”

The antitrust agency also said that where companies had high margins due to cost reductions achieved through improved technology, they will be regarded as exceptions to the new regulations. The agency added that the EU has similar regulations on market-dominant companies and, because it applies the regulation cautiously, only a few cases are prosecuted.

[The following is a Joong-ang Daily editorial appeared on Oct. 6 on the same subject matter.]

Self-Control and the FTC

The Fair Trade Commission seems to be determined to push forward its price regulation policy, which violates market principles. The commission recently announced legislation that revises the fair trade law.

According to the planned revisions, the commission will forcibly lower prices if a company that dominates the market sets the prices for its goods or services much higher than the cost of producing them or much higher than the prices of other companies.

That means the commission will dictate appropriate market prices for all goods and services and it will forcibly lower prices if companies go past them. This is unthinkable except in a centrally controlled socialist economy.

The Fair Trade Commission says it will apply this rule only when a company abuses its market dominance. However, there are few ways for the commission to judge whether companies set certain prices because they dominate the market. The commission says it will control prices when prices are much higher than production costs, which is a vague and arbitrary standard. If the commission judges that a 10-percent profit is appropriate, does it mean that 9-percent profit is reasonable but 11 percent is not?

A market price is a price set in the market according to supply and demand. A reasonable price is set by the market, not by the Fair Trade Commission.
Production costs should be taken into consideration in setting a price, but demand is also a very important factor. Production costs also include costs for management streamlining or research and development.

Unfortunately these costs are not easily calculated. As our market has developed, domestic companies cannot use their controlling power as much as they used to. The Fair Trade Commission says it will not regulate cases in which companies increase profits because they produce new items through new technologies or management innovations or if they reduce production costs.

That means the commission will look into whether companies had new technologies or succeeded in management innovation in every case it investigates. The Fair Trade Commission is not omniscient and omnipotent. It can not reign over the market and companies all the time. The Fair Trade Commission should suppress its desire to use the enormous power it wields to control the market.