KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Research Monograph KOR Competition Policy in the Digital Platform Economy

Digital platforms have boosted consumer welfare and driven innovation and competition by integrating diverse technological advancements. These online platforms facilitate easier business transactions, instant information and content sharing, and the introduction of new products and services. However, as economic agents increasingly depend on them, concerns are growing about the excessive concentration of economic power in a limited number of platforms. As a result, in the past few years, competition policy related to digital platforms has gained more attention, prompting vigorous discussions for improvement.

Globally, competition authorities have conducted numerous investigations, and there have been several lawsuits regarding the abuse of market power by digital platforms, along with active merger reviews. In addition, major jurisdictions, including Germany, the EU, and the US, have taken legislative actions to bolster regulations over their market dominance outside the purview of current competition or antitrust law. This policy shift stems from recognizing the limitations of existing competition policies, as enforcing such laws against the anti-competitive behaviors of digital platforms becomes increasingly challenging, and there is criticism about the asynchronicity in ex-post regulatory approaches.

Against this backdrop, this report puts forth directions for competition policy reform to effectively address anti-competitive behavior by digital platform firms. The focus is on the abuse of market power and mergers that contributed to acquiring and strengthening their dominance. This report consists of four chapters as follows. The first two chapters deal with the unilateral conduct of digital platforms. Chapter 1 analyzes self-preferencing practices resulting from their dual roles, drawing out appropriate regulatory improvement measures based on their categorization, a review of their economic effects, and empirical analysis results. Chapter 2 examines the issue of platform fees, which has become a significant social concern. While exploring desirable approaches, this chapter assesses whether this issue can be viewed from the perspective of price abuse whenhigh platform fees areproblematic by reviewing price abuse cases.

The next two chapters include studies on platform mergers, focusing on vertical and conglomerate mergers, which are receiving increasing attention as they are actively used to form platform ecosystems and diversify businesses. Chapter 3 analyzes how to consider the potential for self-preferencing by platforms in the merger review process. Self-preferencing is possible only when a platform has a dual role, securing its own or affiliated firms that compete with its business users, and non-horizontal mergers are a primary means of acquiring this dual position. Based on literature reviews and theoretical analysis, this chapter identifies considerations for non-horizontal merger reviews related to self-preferencing. Lastly, Chapter 4 investigates the formation and reinforcement of entry barriers due to platform mergers. Through theoretical analysis and reviews of past cases, this chapter provides recommendations for effectively evaluating entry barrier issues in merger reviews.

The collective conclusions can be summarized in two points. Firstly, competition policy reform should fully reflect the unique characteristics of digital platforms. The analysis of their typical unilateral conduct and mergers indicates that their economic effects and pathways are not fundamentally different from those of traditional companies. However, the distinct features of digital platforms can lead to new or multiple forms of anti-competitive behavior, make certain actions more pronounced or severe, and heighten the complexity and technical challenges in analyzing and judging their anti-competitive effects.

Secondly, caution is needed when introducing or strengthening antitrust regulations that extend beyond existing legal frameworks. This report emphasizes the importance of better market monitoring and industry-led discussions on active regulatory intervention on platform fees. For self-preferencing and platform mergers, it highlights the value of case-by-case reviews with assessment criteria for effectiveness. Without sufficient consideration for the dynamism of the digital market, where rapid technological change and innovation lead to emerging business models and blurred market boundaries, regulations mayend up hindering innovation incentives, ultimately hurting competition in the long run. Digital platform competition policy should achieve a delicate balance between reducing the harms of monopolies and protecting the incentives for innovation and healthy competition. At present, a flexible response approach to competition law is deemed necessary, tailored to the specific context of each case, while enhancing enforcement through improved timeliness and effectiveness.

Summary

KDI FOCUS Strategies for Refining the Jeonse Deposit Return Guarantee System

Jeonse, a housing lease model unique to Korea, has long served as a cornerstone of housing security for many families. However, recent significant fluctuations in housing prices have highlighted concerns such as underwater jeonse and reverse jeonse, amplifying calls for reform. A crucial step in addressing these challenges and ensuring the stability of the jeonse system is to expand the scope of the Guarantee for a Return of Jeonse Deposit. In pursuit of this, it is important to accurately reflect risks in return guarantees and to consolidate jeonse guarantees under the unified framework of the Guarantee for a Return of Jeonse Deposit.

- As a uniquely Korean housing rental system, jeonse has enhanced housing stability for ordinary families, but recent fluctuations in the housing market have exposed the risk of tenants not getting their deposits back.

- Approximately 8 million general households in Korea reside in properties owned by others under lease contracts. Of all jeonse and wolse transactions, jeonse takes up nearly half, underscoring its sustained significance for the foreseeable future.

- Jeonse prices started to decline in the latter half of 2022, a trend expected to persist through 2024, accompanied by increasing concerns about reverse jeonse.

- While the jeonse-to-price ratio based on the publicly disclosed value decreases as the property value increases, multi-household units consistently show higher ratios than apartments, implying that the former households are at a greater risk of not recovering jeonse deposits.

- The deposit return guarantee system ensures that if leaseholders fail to meet their return obligations, a guarantor agency will refund the deposit. Presently, guarantees from public guarantor agencies amount to around 170 trillion won.

- Due to a marked rise in guarantee-related incidents from 2022 onwards, the application requirements for the refund guarantee were tightened in May 2023.

- Low-priced houses are mostly excluded from the deposit refund guarantee due to stricter eligibility requirements.

- Regrettably, the jeonse deposit return guarantee system does not adequately shield vulnerable tenants from the risk of not retrieving their deposits, as the guarantee fee rate does not accurately reflect the actual risks involved.

- The Guarantee for a Refund of Jeonse Deposit (HUG) has a lower guarantee fee rate compared to other products, especially against the actual incidence rate of guarantee defaults. Hence, guarantee fee rates should be recalibrated to accurately represent risks, taking into account the actual default rates.

- Since recalibration of guarantee fee rates might increase the rates for lower-priced houses, short-term remedies targeting vulnerable households are necessary.

- As the Guarantee for Jeonse Deposit Loan can drive up jeonse prices by expanding jeonse loans, mitigation is necessary by mandating the purchase of deposit refund guarantees during jeonse loan acquisition process.

- A hybrid guarantee system that utilizes escrow not only ensures the protection of the tenant’s deposit but also allows for the application of LTV regulations, typically exclusive to home mortgages, across all housing types.

- In addressing the inherent weaknesses of the jeonse model, all related guarantee products should be consolidated within one unified framework while adjusting and differentiating guarantee fee rates.

- It is essential to expand the scope and availability of market price data for jeonse properties and strengthen the duties and responsibilities of realtors.

Summary

KDI FOCUS Designing Social Protections for Platform Workers

In the expanding landscape of the platform economy, the rapid rise in the number of platform workers underscores a critical issue: the need for social protection for those not covered by conventional labor laws. Recognizing the transformative impact and significant societal value of the platform economy, it becomes essential to rethink the legal classification of platform workers, moving beyond the traditional "employee" versus "business owner" dichotomy. This paper argues that while platform workers might exhibit similar work patterns, the protection they receive should be proportionate to the labor monopsony power exerted by the platforms they associate with. A harmonized approach that aligns labor and competition policies is crucial to address these challenges.

- Today, platform labor is experiencing a swift expansion both in scope and magnitude.

- While the growth of platform workers presents numerous benefits, recent developments have spotlighted a few notable concerns.

- The discourse surrounding social protection for platform workers has been active, primarily revolving around the question of acknowledging their status as workers.

- The approach needs to be about reconciling the characteristics of the platform economy with genuinely effective protection for its workers.

- By focusing on the labor monopsony inherent to platforms, we can objectively assess the necessity of social protection for platform workers, incorporating discussions on both labor and fair trade policies.

- In this paper, ICT software developer platforms and delivery app platforms are investigated as representative examples of web-based freelance platforms and locally-based labor provision platforms, respectively.

- While the labor supply elasticity offers an empirical estimate of monopsony power, the platform economy necessitates a broader examination of additional factors.

- As for in-house contracts in the ICT developer platform, an empirical analysis shows that its labor monopsony power is on par with that of the typical labor market.

- In the delivery app market, it is imperative to examine the competitive dynamics among platforms from the standpoints of delivery app providers and consumers. Of particular interest is understanding the reasons and frequency of individuals using multiple apps at the same time (multihoming), along with the ease of switching between platforms.

- From the consumer perspective, the entry of newer players and heightened competition among delivery apps have increased multi-homing and reduced market dominance.

- Delivery app riders generally view themselves as wage workers. While they enjoy considerable flexibility in tasks and working hours, they are also subject to significant ex-post oversight through performance evaluations.

- To ensure the effective protection of platform workers while allowing platform-driven innovation, policies must be both flexible and unified under the goal of curbing platforms' monopsony power over labor demand and preventing potential abuses.

Summary

KDI FOCUS Restructuring Platform Merger Review

Platform mergers differ significantly from traditional mergers. In platform mergers, foreclosure issues, which are crucial in traditional vertical mergers, carry less significance but may still arise indirectly. Platforms, moreover, can favor their own businesses potentially disadvantaging competitors, and leverage their market power to new businesses. Lastly, entry barriers could increase as a result of platforms’ multi-service provisions. Nevertheless, platforms can enhance consumer welfare, especially through product (service) bundling. Thus, we need to overhaul the merger review system to incorporate the aforementioned characteristics of platform mergers.

- Amidst the escalating debate on platform regulation, there has been a surge in platform mergers, leading to a corresponding increase in the need for platform merger reviews.

- There is a need for new guidelines for platform merger review to reflect the unique characteristics of such mergers. These guidelines should outline the review methodology and the assessment of potential competitive constraints.

- Indirect network externality plays a crucial role in locking in users to specific platforms.

- Platform firms provide a diverse range of services, offering multiple ancillary service platforms that revolve around a few core platforms or other businesses associated with the platforms.

- Platform firms often pursue mergers to expand into new revenue-creating areas or to strengthen their competitiveness in core services.

- One significant concern regarding anticompetitive practices in platform mergers is the potential for excluding competitors via selfpreferencing in the new markets.

- The addition of new ancillary services through a merger can potentially raise entry barriers in both the platform’s core service areas and the overall platform ecosystem.

- If a vertical merger leads to the foreclosure of purchasing or sales channels, it can seriously harm market competition.

- In mixed mergers, leveraging market power from one market to another can occur through tying.

- The determination of whether a merger is vertical or mixed is bound to be confusing when a platform, acting as an intermediary between consumers and small and medium-sized vendors, seeks to merge in order to add an auxiliary service for these vendors.

- Platform operators have the ability to foreclose competitors in other sectors but only indirectly, using accessibility to users.

- Without tying, platform operators can leverage market power from their core business area to ancillary service areas by raising rival’s costs.

- Platform mergers can raise barriers to entry not only in new markets but also in existing core service areas and the overall platform ecosystem. In some cases, the creation and reinforcement of entry barriers may be a deliberate objective of the merging parties.

Summary

Research Monograph KOR Green Transition Strategy and Implementation

It is imperative for the Republic of Korea to prioritize the development of elaborate green transition strategies and implementation plans. In light of this urgency, this study offers ten chapters addressing select issues on green transition, which provide policy recommendations drawn from identification of problems, assessment of current policies, and empirical analysis.

Chapter 2 (Dr. Yong Hyeon Yang) assesses the national greenhouse gas emission reduction plan the Korean government announced in Oct. 2021. It finds the sectoral strategies to be insufficient for the stated targets and suggests that an energy transition ambition has to be increased as either targets have to be decreased in other sectors or there could be a need for more extensive electrification. Chapter 3 (Prof. Wonhyuk Lim) offers insights on energy transition strategies and their implication for the electricity industry. Periodical simulations should be conducted for multiple scenarios, and the overall cost of transition, including the expenses for networks and standby facilities as well as the levelized cost of energy, should be minimized. Accordingly, transition and phase-out of fossil fuel plants should be systematically planned in stages.

Chapter 4 (Dr. Yeochang Yoon) points out the limitations of the Korean emission trading system (ETS) and presents potential solutions. The current restrictions on banking need to be relaxed to keep the ETS allowance prices from dropping, but such adjustments should be introduced gradually to prevent a sudden decline in supply. Chapter 5 (Prof. Hyungna Oh) raises a possibility of insufficient investment in decarbonization technologies due to first-mover disadvantages. It advocates introduction of carbon contracts for difference to incentivize R&D in green technologies, especially when carbon prices are low or uncertain. Chapter 6 (Dr. Karam Jo) presents the empirical result that patents in some digital transformation technologies can increase patents in climate technologies by an average of 17.3% and underscores the need to promote such digital transformation technologies.

Chapter 7 (Dr. Junghyun Kwon and Dr. Joseph Han) reveals that elevated outdoor temperatures decrease working hours in an inequitable manner and deteriorate workers’ health. These observations imply that climate change could magnify income inequality. As such, protective measures for outdoor workers against high temperatures and support for their job transitions are crucial. Chapter 8 (Dr. Hyunseok Kim) proposes selective subsidies for regions heavily impacted by climate change and green transition, and highlights the necessity of assessing those impacts objectively. Most importantly, local governments should formulate transition plans in line with central government guidelines.

Chapter 9 (Prof. WooRam Park) indicates that a large portion of greenhouse gas comes from establishments with more than 300 workers, and in such industries as petrochemical and steel. It also shows higher carbon productivity in industries with lower greenhouse gas emissions and establishments using less energy. Chapter 10 (Dr. Joseph Han) reveals the empirical result that firms who entered in the first stage of ETS had significantly lower greenhouse gas emissions, energy usage, annual turnover, and employment than those who did in the second stage. The performance of these firms was influenced by the design of the ETS, for example, on what basis the allowances were assigned free of charge or for a fee. Hence, policy design for green transition should pay particular attention to its effects on businesses and employment. Lastly, Chapter 11 (Dr. Sora Chon) observes that the global green transition might trigger both green and energy inflation. Analyzing the effect of inflation factors on the Korean economy finds that such impacts vary based on whether inflation arises from a demand or a supply shock. Consequently, the Korean government's responses should differentiate between inflation factors that are demand-side and supply-side.

Summary

Policy Study KOR The Contingent Effects of Anti-Corruption Agencies on the Right to Prosecute

The efforts of international organizations such as the UN and EU are prompting anti-corruption agencies to spring up across multiple countries as a useful tool to curb corruption. The success of the Corrupt Practices Investigation Bureau of Singapore and the Independent Commission Against Corruption of Hong Kong broadened the horizon for the fight against corruption and built momentum for this movement.

The aims of this study are two-fold: (1) clarification of the conditions of an anti-corruption agency that increase the possibility of investigation and punishment of corruption crimes and (2) identification of policy implications for strengthening Korea’s anti-corruption capacity.

More specifically, this study analyzes how the presence or absence of the right to prosecute in an anti-corruption agency affects its effectiveness. An analysis of dynamic panel data demonstrates that corruption is exacerbated with the power to prosecute given to anti-corruption authorities. The data also show that the lack of such a prosecutorial power reduces corruption, increases prosecutions for office abuse, and strengthens the rule of law.

With the right to prosecute, an anti-corruption agency will weaken its anti-corruption capacity due to collusion or obstruction, and without the power, it will strengthen its function to combat corruption through competition with the prosecutor’s office or police.

Per “double jeopardy,” with the right to prosecute on top of the right to investigate, an anti-corruption body has no choice but to have jurisdiction strictly separate from the prosecutor’s office, so there is no effect of reducing moral hazard through competition. Instead, collusion between authorities with the right to prosecute or obstruction of one another’s investigations may weaken the anti-corruption capacity.

Accordingly, the criminal justice system should be designed based on the principle of checks and balances, taking into account the possibility of conflicts of interest between investigator, prosecutor, potential criminals, or their guardians. The most important thing is that an objective and strict investigation by those who have no interest in the case should always be premised.

Summary

Policy Study KOR A Study on Information Provision and Consumer Protection in Online Platforms

This study investigates how suppliers respond to consumers exhibiting behavioral biases due to drip pricing, specifically whether suppliers will take advantage of this situation. Previous research indicates that when exposed to drip pricing, consumers can react in two opposing ways: (i) becoming less sensitive to later-revealed additional charges due to behavioral biases, potentially increasing demand; (ii) perceiving such practices as deceptive, potentially decreasing their intention to repurchase and damaging the reputation of the supplier and product. Consequently, suppliers face conflicting incentives when determining base and additional charges: the pursuit of immediate profit, achieved by using consumer behavioral biases, against enhancing their long-term reputation through price transparency. In light of this, it aims to empirically analyze which of these incentives prevails in the real market.

Focusing on Airbnb, a representative accommodation-sharing platform, where mandatory cleaning fees are not disclosed until later in the transaction process, this research utilizes new panel data to examine the evolving pricing strategies of suppliers. An analysis of major cities where Airbnb is actively operational reveals a steady relative increase in cleaning fees compared to room rates, which are base prices, from the second half of 2015 to the end of 2018. Furthermore, in analyzing the relationship between cleaning fees and host experience in New York City, controlling for accommodation and host characteristics, transaction conditions, and market situations, the study finds that more experienced hosts tend to charge separate cleaning fees and set hidden cleaning fees higher relative to base prices.

Summary

Research Monograph KOR An Economic Analysis of Platform Labor: Focusing on Monopsony Power and Social Protection

We study platform labor from the perspective of labor monopsony. We start from exploring the size and trend of the domestic platform labor market and the current status of social protection available to platform workers. Extending the often-discussed nature of platform work, we shift our attention to the defining characteristics of digital platforms and the link between product and labor market competitions, focusing on labor supply elasticity with respect to wage and monopsony power. We conduct empirical studies in two distinct areas: the IT freelance market and the food delivery app market. In the context of the IT freelance market, we estimate the elasticity of labor supply by analyzing data collected from a Korean IT freelance platform via web-scrapping. The findings show that the monopsony power of the freelance platform is relatively minimal, suggesting a positive effect of the platform in fostering thicker markets. In contrast, for the food delivery app market which expanded rapidly during the COVID-19 period, a survey of riders unveils certain limitations related to multi-homing and platform switching, thereby signifying a potential for monopsony power in this sector. Extended analyses using app-use data combined with large-scale labor surveys show a downward wage trend with an increase in market concentration―despite stable or even growing employment levels. This pattern contradicts the traditional expectations under labor monopsony, which usually involves negative impacts on both employment and wages. Instead, our findings suggest an asymmetry in bargaining power. We conclude with overarching implications on competition and labor policies, focusing on platform’s monopsony power.

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