1 Regulations on Abuse of Market Dominance in Korea (Analysis & Case Study) Jaeho Moon Korea Fair Trade Commission

2 Market Dominant Enterprises Definition - Any enterpriser holding market dominance who can determine, maintain, or change the prices, quantity or quality of commodities or services or other terms and conditions of business as a supplier or customer in a particular business area individually or jointly with other enterprisers. - Any enterpriser holding market dominance who can determine, maintain, or change the prices, quantity or quality of commodities or services or other terms and conditions of business as a supplier or customer in a particular business area individually or jointly with other enterprisers.

3 Market Dominance A firm’s capability to determine, maintain, or change the prices, quantity or quality of commodities or services or other terms and conditions of business as a supplier or customer. A firm’s capability to determine, maintain, or change the prices, quantity or quality of commodities or services or other terms and conditions of business as a supplier or customer. Factors to Consider Factors to Consider - market share - market share - entry barriers - entry barriers - relative size of competitive firms - relative size of competitive firms - possibility of collaboration between competitors - possibility of collaboration between competitors - existence of adjacent market - existence of adjacent market - market foreclosure - market foreclosure - other factors - other factors

4 Market Dominance Presumption of Market Dominance Presumption of Market Dominance It is presumed that an enterprise has market dominance if the presumption requirement is satisfied even in the absence of substantial evidence It is presumed that an enterprise has market dominance if the presumption requirement is satisfied even in the absence of substantial evidence * Presumption requirements - Annual turnover or purchasing volume worth 4 billion won or more - Annual turnover or purchasing volume worth 4 billion won or more - Market share of one enterprise exceeding 50% - Market share of one enterprise exceeding 50% - Market share of 3 or less enterprises exceeding 75% (less than 10% of market share would be excluded) - Market share of 3 or less enterprises exceeding 75% (less than 10% of market share would be excluded)

5 Particular Business Area The term "particular business area" means an area in which any competitive relation exists or may exist, by the subject, stage, or geographical area of such trade. The term "particular business area" means an area in which any competitive relation exists or may exist, by the subject, stage, or geographical area of such trade. ⇒ defining “Relevant Market”

6 Prohibited Activities 1. Unreasonably fix, maintain or alter the price of a good or service fees 2. Unreasonably control the sale of goods or the rendering of services, which is referred as “inventory control” 3. Unreasonably interfere in the business activities of other enterprises 4. Unreasonably interfere the entry of new competitors 5. Engage in unreasonable transaction to eliminate competitors or harm the interest of consumers

7 Remedies and Sanctions 1) Corrective order － To reduce price, to discontinue violating act, to announce the fact that the firm was punished, and to take other measures necessary for correction － To reduce price, to discontinue violating act, to announce the fact that the firm was punished, and to take other measures necessary for correction 2) Surcharge － Impose surcharge upon a violating firm not exceeding an amount equivalent to 3 % of the annual turnover － Impose surcharge upon a violating firm not exceeding an amount equivalent to 3 % of the annual turnover 3) Criminal Penalty － Imprisonment up to 3 years or fine up to 200 Million Korean Won － Imprisonment up to 3 years or fine up to 200 Million Korean Won

8 Case Study Following slides introduce cases of abuse of market dominance in Korea by prohibited activities.

9 Abuse of Pricing Article 5-2 Clause 1 of the ENFORCEMENT DECREE OF THE MONOPOLY REGULATION AND FAIR TRADE ACT (the Decree) Article 5-2 Clause 1 of the ENFORCEMENT DECREE OF THE MONOPOLY REGULATION AND FAIR TRADE ACT (the Decree) The act unreasonably fix, maintain or alter the price of a good or service fees means a sharp increase or only slight decrease, without justifiable reason, in the price of goods or services relative to changes in the supply and demand or in supply cost (limited to the general level of the like or similar businesses). The act unreasonably fix, maintain or alter the price of a good or service fees means a sharp increase or only slight decrease, without justifiable reason, in the price of goods or services relative to changes in the supply and demand or in supply cost (limited to the general level of the like or similar businesses).

10 Abuse of Pricing Facts Facts - The examined companies (M/S 78%) maintained the price of their biscuits but reduced the weight of the same product, thereby actually raising the price of the good - The examined companies (M/S 78%) maintained the price of their biscuits but reduced the weight of the same product, thereby actually raising the price of the good Analysis Analysis - The KFTC compared the price increase and the cost increase. - The KFTC compared the price increase and the cost increase. Decision by the Commission Decision by the Commission 1. Lower the price or increase the amount of the product 1. Lower the price or increase the amount of the product 2. Announce that the companies violated the law and were subject to corrective measures. 2. Announce that the companies violated the law and were subject to corrective measures.

11 Inventory Control Article 5-2 Clause 2 of the Decree. Article 5-2 Clause 2 of the Decree. 1. significantly decreasing, without justifiable reason, the supply of goods or services in light of recent trends; or - “Recent trends”: Study & identify trends of supply volume by product, region, client, and season over a long period - “Recent trends”: Study & identify trends of supply volume by product, region, client, and season over a long period 2. decreasing, without justifiable reason, the supply of goods or services despite a supply shortage in distribution. 2. decreasing, without justifiable reason, the supply of goods or services despite a supply shortage in distribution.

12 Inventory Control Facts Facts - The examined company decided to raise the selling price of soybean oil according to the exchange rate hike during the Asian Financial Crisis of The examined company decided to raise the selling price of soybean oil according to the exchange rate hike during the Asian Financial Crisis of Immediately prior to the price increase (’ ), the company significantly reduced the sale of soybean oil products during(’ ~12.16.) - Immediately prior to the price increase (’ ), the company significantly reduced the sale of soybean oil products during(’ ~12.16.) Analysis Analysis - Demand jumped with the possibility of a price rise of soybean oil which mainly uses imported raw materials - Demand jumped with the possibility of a price rise of soybean oil which mainly uses imported raw materials - There was enough inventory of raw materials needed for production, and there were no inevitable circumstances to limit the delivery of goods - There was enough inventory of raw materials needed for production, and there were no inevitable circumstances to limit the delivery of goods - By adjusting the delivery of soybean oil, the company managed to accumulate greater profits than normal with higher prices - By adjusting the delivery of soybean oil, the company managed to accumulate greater profits than normal with higher prices

13 Inventory Control Decision by the Commission Decision by the Commission - Prohibit adjustment of delivery, and order to announce the violation of the law and that it was subject to corrective measures - Prohibit adjustment of delivery, and order to announce the violation of the law and that it was subject to corrective measures - Levy penalties: 315 million won surcharge & prosecution - Levy penalties: 315 million won surcharge & prosecution

14 Interfere in the business activities of other enterprises Article 5 Clause 3 of the Decree Article 5 Clause 3 of the Decree 1. Hindering without justifiable reason, the purchase of raw materials needed for the other Enterprise's production 2. Employing human capital indispensable to the business activities of another firm by granting or promising excessive economic compensation compared to normal practices 3. Refusing discontinuing, or limiting, without justifiable reason, the use of or the access to essential facilities for the manufacturing, providing, selling of the products or services of other Enterprises 4. Engaging in other unreasonable Acts hindering the business activities of other Enterprises.

15 Interfere in the entry of new competitors Article 5 Clause 4 of the Decree Article 5 Clause 4 of the Decree 1. Entering into an exclusive agreement with distributors without justifiable reason 1. Entering into an exclusive agreement with distributors without justifiable reason 2. Purchasing of rights necessary to enter the business of incumbent companies without justifiable reason 2. Purchasing of rights necessary to enter the business of incumbent companies without justifiable reason 3. Denying, suspending or limiting the use or access of elements essential for the production, supply, or sale of a good or service of another business without justifiable reason 3. Denying, suspending or limiting the use or access of elements essential for the production, supply, or sale of a good or service of another business without justifiable reason 4. Engaging in other activities that impair the entrance of new competitors 4. Engaging in other activities that impair the entrance of new competitors

16 Excluding Competitors & Impairing Consumer Interests Article 5 Clause 5 of the Decree Article 5 Clause 5 of the Decree 1. Cases where a competitor could be excluded by the unjust supply of goods or services at a price lower than normal costs or procurement of goods or services at a price higher than normal costs 2. Cases where a company unjustly agrees to do business on the condition that the corresponding party does not do business with the company’s competitor

17 Excluding Competitors & Impairing Consumer Interests Facts Facts - Microsoft (MS) bundled its WMS in its Windows Server O/S - Microsoft (MS) bundled its WMS in its Windows Server O/S bundled its WMP in its Windows PC O/S bundled its WMP in its Windows PC O/S bundled its Instant Messenger in its Windows PC O/S bundled its Instant Messenger in its Windows PC O/S Tying products (Server OS & PC OS) : Core products in SW industry Tying products (Server OS & PC OS) : Core products in SW industry Tied products (WMS, WMP and IM) : Increasing importance in New Economy Tied products (WMS, WMP and IM) : Increasing importance in New Economy - MS has Market dominance power in Server OS and PC OS market - MS has Market dominance power in Server OS and PC OS market 78% in PC server OS market 78% in PC server OS market 99% in PC OS market 99% in PC OS market - MS made late entry into tied product market - MS made late entry into tied product market

18 Excluding Competitors & Impairing Consumer Interests Standard of Analysis Standard of Analysis It is illegal to condition the sale of a “tying” product upon the purchase of a “tied” product. It is illegal to condition the sale of a “tying” product upon the purchase of a “tied” product. 1. Dominance in tying product market 2. Tying vs. tied products : distinct 3. Coercion : purchase against will 4. Restraining competition (Weighing anti-competitive effects against efficiency) (Weighing anti-competitive effects against efficiency)

19 Excluding Competitors & Impairing Consumer Interests Analysis Analysis 1. MS abused its market dominance in the OS market by forcing consumers to purchase its separate product WMS, WMP, IM raised concerns over the possibility of limiting the competition in the media server program market 2. Such actions infringed upon consumers’ rights in choosing media server programs 3. The bundling affects competition, hinders technological innovation and hurts consumer benefits

20 Excluding Competitors & Impairing Consumer Interests Decision by the Commission Decision by the Commission 1. Corrective Orders - to separate the WMS from the Window server OS - to separate the WMS from the Window server OS - to provide 2 versions of PC OS - to provide 2 versions of PC OS Another Windows PC OS without WMP & IM Another Windows PC OS without WMP & IM Current OS w/ competing MP & IM download icon Current OS w/ competing MP & IM download icon 2. Surcharge - 33billion won (approximately US$33million) - 33billion won (approximately US$33million)

21 Thank You