Unclassified DAF/COMP/GF/WD (2006) 38: 08-Feb-2006 English - Or. English Competition Committee
Unclassified DAF/COMP/GF/WD (2006) 38: 08-Feb-2006 English - Or. English Competition Committee
Unclassified DAF/COMP/GF/WD (2006) 38: 08-Feb-2006 English - Or. English Competition Committee
-- Session II --
This contribution is submitted by Korea under Session II of the Global Forum on Competition to be held on 8 and
9 February 2006.
English - Or. English
JT00200675
1. Introduction
3.1.1 Fact
3.1.2 Resolution of the KFTC (Korea Fair Trade Commission)
3.1.3 Decision of the Courts
3.1.4 Significance of the case
3.2.1 Fact
3.2.2 Resolution of the KFTC (Korea Fair Trade Commission)
3.2.3 Decision of the Courts
3.2.4 Significance of the case
4. Conclusion
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1. Introduction
1. Since the enactment of Monopoly Regulation and Fair Trade Act (MRFTA) in 1980, the KFTC
has recognized cartels as the biggest enemy to the market economy and worked aggressively to eradicate
them.
2. Especially, last year, the KFTC imposed the largest amount in surcharge in history on telecom
operators for forming a collusion and pulled off a remarkable achievement such as creating a cartel
investigation team and successfully holding ICN Cartel Workshops.
3. However, the stricter the legal enforcement on cartels by the competition authorities get, the
harder enterprisers try to conceal evidence of an agreement and conduct cartels in secret. Most of cartel
cases dealt by the KFTC were those where an agreement was proven with circumstantial evidence without
an explicit written agreement.
4. This contribution is to describe how the KFTC corrects cartels without direct evidence of an
agreement through past cartel cases and provisions on cartel in Monopoly Regulation and Fair Trade Act
(MRFTA).
5. Para.1 of Article 19 of the MRFTA prohibits the following improper concerted acts.
No enterpriser shall agree with other enterprisers by contract, agreement, resolution, or any
other means to jointly engage in an act, or let others do this kind of activities, falling under any
of the following subparagraphs11, that unfairly restricts competition (hereafter referred to as
unfair collaborative acts)
7. That is, according to the provision above, an agreement where two or more enterprisers
(parties to the agreement), through contract, agreement, resolution, or any other means (means of an
agreement), jointly determine, maintain, or change prices and conduct other activities stipulated in
Para.1 of Article 19 of the MRFTA (subject of an agreement) is defined as a cartel and banned by the
KFTC.
8. Moreover, such an agreement includes both an explicit agreement such as contracts and
agreements and a tacit agreement such as mutual understanding among enterprisers.2
9. However, as cartel regulations are strengthened, enterprisers try to reach an agreement in secret
and not to leave any explicit evidence, so it is not an easy task to prove the existence of an agreement.
Therefore, when there is no direct evidence of an agreement, the KFTC proves a cartel case based on
circumstantial evidence. The followings are examples of such circumstantial evidence listed in Guidelines
for Collaborative Acts, the KFTCs internal guidelines.
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< Example 1> When suspected enterprisers internal documents mention identical price
increase, output reduction, etc.
< Example 2> When suspected enterprisers show identical conduct after having secret
meetings
< Example 3> When suspected enterprisers agree to exchange information on price or
output, or have regular meetings to this end.
< Example 4> When a specific company implements price increase or output reduction after
observing its competitors responses to the companys announcement of such actions.
11. When a conduct is in the interest of actors only when acting jointly, while it would harm the
interest of each actor when acting unilaterally
<Example1> When actors increase their price identically despite oversupply or decline in
demand and the absence of factors triggering cost increase.
< Example 2> When there are simultaneous price increases despite mounting inventory.
12. When parallel behaviours of enterprisers in question cannot be explained by market forces
<Example 1> When price is identical or remains rigid despite changes in supply & demand,
differences among suppliers of raw materials, and geographic distance between suppliers
and consumers.
<Example 2> When price changes are identical even when production costs vary due to
differences in raw material costs, production processes, wage increases, and bill discounting
rates.
<Example 3> When large price increases cannot occur in a short period of time without
collaborative actions, given market conditions
13. When parallelism in actions among enterprisers is almost impossible without an agreement,
considering structure of the industry in question
<Example1> When prices of each enterpriser are identical, even with significant degrees of
product differentiation.
<Example2> When suppliers show identical actions, even when it is hard for them to do so.
For example, in markets with few transactions or those for sophisticated customers.
14. The Presumption of an Agreement system is stipulated in Para. 5, Article 19 of the Act, and,
pursuant to the system, a cartel agreement can be presumed even with the absence of an explicit agreement
if there is ) conformity of outward conduct and ) competition-restrictiveness.
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Article 19 (Prohibition of Unfair Collaborative Acts) Where two or more enterprisers are
committing any acts listed in the subparagraphs of paragraph (1) that practically restrict
competition in a particular business area, they shall be presumed to have committed an unfair
collaborative act despite the absence of an explicit agreement to engage in such act.
15. However, to prevent enterprisers from being wrongfully accused, the KFTC presumes a cartel
agreement if there is ) uniformity of outward conduct and ) competition-restrictiveness and )
circumstantial evidence listed in Guidelines for Collaborative Actssupports the suspected cartel case.
16. The KFTC has dealt with many cartel cases without direct evidence of an agreement using
circumstantial evidence.
17. The following two cases illustrate where the KFTC and courts stand regarding what
circumstantial evidence suffices to presume a cartel agreement and in what cases such presumption can be
rebutted when there is no direct evidence of an agreement for several parallel price adjustments among
enterprisers in oligopoly markets that cant be readily explained by usual market forces.
3.1.1 Fact
18. Four toilet roll manufacturers accounted for 85% of the domestic market share. Originally, their
producer sale prices were a bit different as a result of competition in the market.
19. In 1995, as price of raw material for toilet rolls declined dramatically, the government issued an
administrative guidance to these companies to cut price. In according to this, in 1996, company A and B,
the two biggest manufactures in the market, internally determined to set their producer sale prices at 8,261
and 8,448 won respectively after consulting with the government. After that, company C and company D,
the third and fourth largest in the market, set their prices at 8,448 won. Then, on 1st, Jun, 1996, the four
manufactures implemented the decreased price. (The first price reduction)
20. And nine months later, on 1st, Mar, 1997, company B increased its price to 8,668 won with
launch of new products. Then, company C also increased the price of its existing products to 8,668 won
and Company D also increased its price to 8,668 won after launching new products in May, 1997. (The
first price increase)
21. Then, on 16th, Jul, 1996, Company A increased its price to 9,306 won and on 1st, Aug, 1997, the
rest also increased their price to 9,306 won simultaneously. (The second price increase)
22. Four months later, on 28th, Nov, 1997, company A internally determined to set their price at
10,494 won and implemented this price increase on 24th, Dec, 1997. Then, the rest three companies also
had their own deliberations on 15th and 16th, Dec, 1997 to raise their price to 10,494 won and implemented
this price adjustments on 23rd, Dec, 1997. (The third price increase).
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The four manufactures increased their prices of their toilet rolls to the same price even
though each company had different manufacturing costs and compositions of them,
management status, marketing strategies, and pricing strategies.
They increased standard prices to the same level by the same rate simultaneously or around
the same time even though there was neither dramatic change in supply and demand in the
toilet roll market nor any factor to trigger the identical price increase.
They had the knowledge of and indirectly exchanged information on their competitors
future policies to increase prices as they notified such policies to retailers & wholesales
orally or in a written form in advance.
Executives of the four companies testified that there were discussions on reigning in
excessive price competition in the market during meetings of the Association for Trade
Order in the Toilet Paper market in Apr, Jun, and Nov, 1997.
With the launch of the KFTCs investigation into the case in Jan, 1998, the four companies
producer sale price has diverged since Feb, 1998.
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25. Against the resolution of the KFTC, the four manufacturers appealed to the High Court arguing
that the parallel pricing of company C and D were little more than unilateral acts pursuing best response to
price increases or reductions by company A and B that had price leadership in the market.
26. The High Court ruled that the four parallel price adjustments of those enterprisers were presumed
to be the result of a cartel agreement considering that price adjustments were implemented simultaneously
or around the same time, that it would have been impossible for Company B, C and D to maintain the same
price for 20 months without a collusion in advance, and that manufacturers had discussion on the restraint
of excessive price competition. The Court merely pointed out some problems with the KFTCs calculation
of the surcharges on these companies.4
27. The defendants again appealed the decision to the Supreme Court, and it issued a ruling a bit
different from decisions by the KFTC and the High Court. That is, in this case, for the first price increase
and the first price reduction, the presumption of an agreement is overturned. More specifically speaking,
the Supreme Court ruled that presumption of an agreement can be overturned in the following situations.
29. Pursuant to this, the Court ruled that the first price reduction was the result of a unilateral price
imitation, not a collusive agreement, because, even though the three companies prices were identical,
market leaders company A and B internally set their prices at 8,261won and 8,448 won respectively after
consultations with the government in response to the governments administrative guidance to cut price
and, then, company C and D just imitated the two market leaders price.
30. The Court said that the presumption of an agreement is rebutted in the first price increase as
well, because company C and D seemed to have increased their prices unilaterally two months after the
price hike of market leader company B.
31. However, it found that price adjustments in the second price increase and third increase were
not likely the result of unilateral price imitation as the three companies showed signs of more serious price
synchronization than they did in the first price cut & increase, such as having internal deliberations on
price hikes around the same time and implementing the new price on the same date5.
32. Regarding several cases of parallel price hikes or reductions among enterprisers without direct
evidence of an agreement, the KFTC presumed an agreement based on various economic evidence and
communications evidence, and it was successful in proving an agreement in the second and third price
hikes. However, the presumption of an agreement was rebutted for the first price cut & increase as the
Court found the weaker firms just set their price imitating the market leaders unilaterally.
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33. However, there still remains room for discussions about whether it is possible, in oligopoly
markets, to clearly distinguish unilateral price imitation from parallel price increases & reductions where
market dominant firms first implement price increases or reductions predicting that the rest would follow
suit and then the rest actually did. Furthermore, if such distinction is possible, it is still debatable what
criteria would be considered valid.
3.2.1 Fact
34. Company A and B shared the domestic coffee market. The price of two makers products was
originally a bit different. But, from 1st, Jul, 1997, company B continued increasing its product price to the
same product price of company A as shown in the Table 2.
Table2. The two coffee makers price increase for instant coffee products
(Unit: won)
Prior to increase 97.6.2 97.7.1 97.8.18 97.10.7 97.12.15 97.12.19 98.1.12
Company A 5,181 5,445 5,720 6,446 7,150
Company B 5,258 5,445 5,720 6,446 7,150
35. In this case, there is no direct evidence of an agreement. But, the KFTC presumed an agreement
based on i) uniformity of outward conduct, ii) practical competition restrictiveness, and iii) the
circumstantial evidence, and it imposed surcharges of about 3 billion won on the concerned enterprisers.
The two coffee manufacturers adopted the same price starting from 1st, Jul, 1997 despite
differences in the two major price increase-triggering factors - foreign exchange rates and
coffee bean prices they applied and the composition of costs.
They also exchanged information about its own plan of price increase.
On 9th, Jan, 1998, the branch office of company A faxed the plan of price increase on
12th, Jan, 1998 to the branch of company B on 9th, Jan, 1998, and then the latter faxed
it to their main office.
The two examinees notified scheduled price increase to each other prior to actual
price increases. For example, on 12th, Aug, 1997, the very next day of company As
price increase, company Bs branch offices notified company Bs scheduled price
hike to company As branch offices.
Their sales and operating profit rates increased significantly after the price hikes in 1997 as
compared with the previous year.
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37. Against the resolution of the KFTC, the two coffee manufacturers appealed to the High Court
arguing that the parallel price adjustments of company A and B was just the result of company Bs
imitating the price change of company A, not a collusive agreement between them.
38. The High Court ruled that the four times of parallel pricing of the two companies were presumed
to be the result of a price agreement, considering that they adopted the same price despite differences in the
costs, that company B failed to present internal documents and other evidences to prove that its price
changes were just unilateral actions, and that the two companies frequently exchanged their price
information through branch offices. And then, the Court merely pointed out some problems with the
KFTCs calculation of surcharges imposed on these two companies.
39. However, the Supreme Court issued a ruling that overturned the decisions of the High Court and
the KFTC rebutting the presumption of an agreement for the following reasons.
In oligopoly markets, similar or same price of each companys product alone is not
sufficient proof of a cartel agreement. Enterprisers can independently change their prices
without an explicit agreement or a tacit one among them as the result of independent
decision-making that imitating competitors prices are in their interest. .
Company B seems to have imitated Company As price increase given the peculiar
circumstances of the
domestic coffee market at that time where cheap products was considered as low-grade
products and did not sell well.
Though sales representatives of two companies branch offices faxed to each other
documents containing information on price increases,
enterprisers had decided on the price increase at different period, and those
documents were written for the purpose of notifying such price changes to their
distributors, not exchanging information prior to a price collusion.
It is not natural to believe that the enterprisers ordered employees at their branch
offices, not employees at the headquarters, to exchange information to form a price
collusion.
40. This case is very alike to the case of toiler roll, in that, in oligopoly market, the concerned
enterprisers adjusted their prices to the same price several times at the same or similar time. Also, in these
two cases, the timing of price adjustments became similar and similar over time, and that, finally, they
adjusted price on the same date.
41. However, the conclusions for the two cases are different due to peculiar circumstances of the
domestic coffee market where expensive products sell better than cheap ones. In case of toilet roll, the
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parallel pricing by enterprisers the second and third price hikes were judged collusive action under
significant degrees of price synchronization. On the while, in case of coffee, a series of parallel pricing by
manufacturers was judged unilateral price imitation.
42. But, there still remains a question whether circumstantial evidence such as the peculiar
circumstances of the coffee market alone is valid and sufficient enough to judge the above series of parallel
pricing purely price imitation. Also we can consider the way to equate price information exchange between
branch offices with that between the headquarters, as branch offices are also part of a company.
4. Conclusion
43. Cartel is little more than stealing cash from consumers pockets.
44. Therefore, the current MRFTA stipulates that, regardless of existence of direct evidence of an
agreement, cartels can be subject to surcharges of up to 10 % of related sales and that concerned parties
can be prosecuted and subject to either three years prison term or fines of not exceeding 200 million won.
Such sanctions are stronger than those against abuse of market dominance or unfair trade activities that
impose surcharges of 3% and 2% of related sales respectively.
45. However, cartels are often formed in secret without direct evidence of an agreement, in reality, it
is not easy to identify them. Therefore, what matters most in regulating cartels whose direct evidence of an
agreement is not found or does not exist is determining what amount and quality of circumstantial evidence
is sufficient to prove an agreement. On this, the KFTC has proved an agreement by employing
communications between suspected cartel operators, market conditions, market structure, etc.
46. Cartels continue to be forthcoming among enterprisers who want to avoid competition despite
strong sanctions against cartels. To better respond to this and prove a cartel agreement successfully,
competition law enforcers need to thoroughly analyze evidence of communications and economic evidence
to aggressively present circumstantial evidence of an agreement.
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NOTES
1.
11