Case Study : Refusals to deal (Korea). 13 October 2006. By Sun, Joong-Kyu Korean Fair Trade Commission. Contents. Theoretical Discussion on Refusal to deal Korean Regulations on Refusal to deal Case I : Refusal to supply hot coil to a competitor
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13 October 2006
By Sun, Joong-Kyu
Korean Fair Trade Commission
- Under market economy, undertakings basically have the freedom to choose their transaction partners.
- ∴ An undertaking is free to choose whether or not to start/continue transaction with other undertakings & to choose whom to deal with.
- But, depending on circumstances, refusal to start transaction or suspension of transaction may restrict competition in the market concerned, by unfairly making business activities of a transaction partner difficult.
- Assume that there is only one steel sheet maker (A)
- Monopolist A supplies steel sheet to car makers b, c, d
- If A refuses to supply steel sheet to b without rational reasons, b will find it difficult to run manufacturing business → in the end, exit the car market
- Refusal of A to deal with b substantially reduces competition in the car market.
- Decrease in competition ultimately affects consumers of cars by reducing pressures on c & d to cut price or enhance service.
- In principle, damage of the party concerned in general refusal to deal is redressed by civil lawsuit.
- But, individual remedies by civil lawsuit are insufficient to redress harms of such refusal to deal on the entire efficiency of market & on consumer welfare.
- ∴For certain cases, refusal to deal need to be regulated by the Monopoly Regulation and Fair Trade Act (MRFTA); in order to prevent or correct a decrease in the entire efficiency of market/in consumer welfare that can by caused by refusal to deal
- Abuse of market-dominant position (Article3-2 of the Act) : regulate refusal to deal of a market dominant firm
- Unfair business practices of general undertakings (Article23) : regulate refusal to deal of general undertakings without market-dominance
- A market dominant firm : a company with enough market power allowing it to unilaterally determine trading terms such as the price and supply of products.
· a single firm exceeds 50 percent
· the combined market share of the top three firms is more than 75 percent.
- Prohibit a market dominant firm from unfairly refusing to deal with a particular undertaking, making business activities of the undertaking difficult by dramatically limiting the volume/ content of the traded goods & service (Investigation guideline)
- The MRFTA regulates refusal to deal as representative unfair business practice (Enforcement Decree)
- The most important criteria to determine whether or not refusal to deal violated the MRFTA; whether or not competition is restricted in market (Investigation guideline)
- Determine competition restraint, comprehensively based on;
· Whether or not goods/service in refusal to deal are essential for the transaction partner to run its business (if not essential, the effect of restraining competition is low).
· Whether or not the refused partner can easily find alternative transaction partner (If so, the effect of restraining competition is low).
· Whether or not a particular undertaking came to have difficulties in its business activities &, as a result, competition was substantially reduced in the market concerned (If the undertaking does not have difficulties in doing business, the effect of competition is low).
· Whether or not refusal to deal made the market entry of one’s competitors (including potential competitors) difficult (if the market entry is not difficult, the effect of restraining competition is low).
· Whether or not refusal to deal was used as a means to force behaviors prohibited by the MRFTA (ex) maintenance of resale prices, vertical restraint, concerted action, etc.)
- Company P, the domestic monopolist producer of hot coil, refused to supply hot coil to company H (which is in competition with P in the market for cold rolled steel sheets produced from hot coil) without clear reasons, despite several times of request from H for the supply.
※ P is the sole producer of hot coil in Korea, with 79.8% of market share as of 2000. (The rest of them are imports.)
※ Cold rolled steel sheets are used for making car bodies.
Market share as of 2000: company P 58.4%, company D 13.7%, company H 11.1%, company Y 7.9%
- The behavior of P is to maintain/strengthen its dominant position in the market for cold rolled steel sheet by using its dominance in hot coil market.
· An intention to exclude competitors by not supplying hot coil which is the major raw material of the competitors in the cold rolled steel sheet market.
- Company H (the refused party) had no choice but to import hot coil due to the behavior of P. Thus business activities of H became difficult due to additional cost for import, uncertainty of transaction, etc.
- Domestic purchase of the said product became impossible, leading to weakened buying power (when importing the said product) & unfavorable condition (when negotiating transaction terms).
Consequently, negative for national economy
- Hot coil used for cold rolled steel sheet is not a goods for external sales but intermediate goods for making its own cold rolled steel sheet.
- Refusal to supply hot coil was due to its lack of supply capacity, not the intention to exclude competitors.
- The High Court ruled in support of the decision of the KFTC.
- Currently pending in the Supreme Court
- In Busan, H Beer (beer) and D distilling (soju) have dominance in the markets for beer & soju, respectively. They refused to supply beer & soju to new liquor wholesalers who supplied beer & soju to retailers at lower prices than other wholesalers at the request of Korean Liquor Association.
※Share of H Beer in the beer market in Busan: 83%
※Share of D Distilling in the soju market in Busan: 87%
- The behavior of H Beer and D distilling has an effect of, in effect, blocking price competition in the wholesale market for liquor in Busan.
- No rational reasons for the refusal to deal, because the volume of production & inventory of H Beer and D distilling is not insufficient to the extent of refusing supply.
- Refusal of H Beer & D distilling to supply Beer/soju made business activities of new wholesalers extremely difficult, in effect, blocking their entry into the market.
- It was an inevitable refusal to supply, for the purpose of stable maintenance of distribution channel.
- It was the minimum necessary measure to prevent low prices from leading to a decrease in sales of the existing wholesalers;
∵ This could make it difficult for them to retrieve bonds.
- It is too exaggerating to say that sales at low prices by small-scale new wholesalers would disrupt the liquor distribution channel.
- Rather, refusal to deal in this case has greater effect of making monopolistic & oligopolistic structure rooted in the liquor wholesale market.
- No big correlation between an increase & decrease in receivables and an increase & decrease in sales.
- Hard to see that small-scale new wholesalers would decrease sales of the entire liquor wholesalers in Busan to the extent that they can not repay their debt.
- H (a telephone company) refused to list the phone numbers of subscribers of A (a new competitor) on the phone book published by itself.
- Had its affiliated company (another company publishing a phone book) refuse to list the phone numbers of A’s subscribers.
※ Market share of the phone book published by H: 83%
※ Market share of H in the market for local call services: 98.2%
- A Phone book helping subscribers identify phone numbers is essential service for local call operators.
· For company A (a new entrant with low market share), in particular, listing of subscribers’ phone numbers is a very important means of competition.
- Company A can publish phone books. However, a phone book only composed of its own subscribers’ phone numbers does not have significant meaning, since A is a new entrant with just 1.8% of market share.
- No rational reasons for H to refuse listing the numbers;
∵ It costs company H little to list phone numbers of company A’s subscribers. Rather, it offers convenience to the phone book users.
- Consequently, the behavior of H can be seen as an effort to maintain/strengthen its market dominance by excluding new companies in the domestic market for local fixed line phone service.