[Editorial] Penalizing firms for charging more at home than abroad is an outdated idea

The Korea Fair Trade Commission (KFTC) issued a legislative notice on proposed amendments to the provision banning abuse of market-dominant positions in the Enforcement Decree of the Monopoly Regulation and Fair Trade Act (MRFTA). The proposal explicitly designates as punishable conduct the practice of a monopoly or oligopoly firm unfairly setting prices higher at home than in overseas markets, or quickly raising product prices when costs rise while keeping them high when costs fall to reap excessive profits. But critics inside and outside the market say this amounts to government price controls.
In a market economy, prices are fundamentally determined by supply and demand. Abuse of market power by monopoly or oligopoly firms can, of course, be subject to regulation. The problem arises when the government punishes companies on the grounds that their prices are substantially higher than their costs or higher than those overseas. That is tantamount to the government deciding what constitutes a fair price. An effort to prevent price abuse could inadvertently result in the government taking the place of the market.
Similar controversy arose in the past. In 2007, the KFTC sought to amend the Enforcement Decree to allow prices to be regulated as abusive if they were markedly higher than costs or excessively above the usual levels in the same industry. At the time, the business community strongly objected, calling the move anti-market. The proposal ultimately fell through after the Regulatory Reform Committee recommended withdrawing it, saying it conflicted with the fundamental principles of a market economy.
The vagueness of the criteria for determining illegality is also a concern. The proposal lowers the evidentiary threshold by easing the requirement for price abuse from a “marked increase” to a “substantial increase.” However, there is still no clear standard for what magnitude of price increase would count as substantial. There are concerns that companies will be more exposed to arbitrary interpretations by regulators.
The idea of regulating prices based on the cost of goods is also risky. Video platforms incur almost no additional costs when they gain one or two users. But servers, content and research and development (R&D) entail enormous fixed costs. High profits may also be the reward for investments made and innovations pursued while taking risks. Regulating prices in relation to costs could weaken incentives for the high-risk investment needed in advanced industries such as new drugs and semiconductors.
Regulating domestic prices by comparing them with prices overseas also calls for caution, since factors that affect prices—including taxes, logistics costs and market size—differ from country to country. The so-called “rocket and feather” phenomenon, in which prices rise quickly but fall slowly, also has its economic rationale. Inventory costs, the costs of changing prices and a desire to prepare for future cost increases may all play a role.
The KFTC’s aim of preventing monopoly or oligopoly firms from engaging in unfair pricing abuses is entirely understandable. But artificially suppressing prices is unlikely to solve structural problems in the market. Higher prices and profits may instead encourage new competitors to enter the market. Lowering barriers to entry and promoting competition is the fundamental solution to the harms caused by monopolies. During the public comment period, the government should fully gather views from the business community and experts and establish objective, clear criteria for determining whether conduct is unlawful.