KDI - Korea Development Institute - RESEARCH - Research Areas

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

Policy Study KOR Causes of self-employment management difficulties and policy directions

This study analyzes the factors affecting the sales, operating profits, and expenses of the domestic self-employed by using the MDIS data of the wholesale and retail industry for the last 20 years.

First, the operating profit of the self-employed has been on a downward trend since the 2010s. As of 2019, the average operating profit fell to 16.87 million won in the wholesale and retail business and 12.89 million won in the lodging and restaurant business. This was significantly lower than the operating profit of 20 years ago (on a real value basis).

Second, the decline in operating profit was attributed to cost increases while sales growth was limited due to market competition. In particular, the biggest increase among expenses was ‘other expenses’. The proportion of other expenses to sales more than doubled from 4.6% in 2000 to 9.5% in 2019 in the wholesale and retail industry, and in the lodging and restaurant industry, it increased from 45.8% to 66.9% during the same period.

In addition, as a result of analyzing the factors affecting the sales of the self-employed, there was a tendency for the surplus of self-employed people to significantly decrease sales. When the surplus increased by 1,000 people, the sales of the self-employed in wholesale and retail business decreased by 0.76 to 0.94 million won, and the sales of the lodging and restaurant businesses tended to decrease by 1.49 to 2.36 million won.

Lastly, the surplus of self-employed and rising costs in the wholesale and retail business lowered the average annual operating profit by 1.26 million won and 1.11 million won, respectively, and these magnitudes were strong enough to reach 3.95% and 3.48% of the operating profit. In the case of the lodging/ restaurant industry, the decrease in operating profit due to oversupply and rising costs was found to be 6.07 million won and 2.12 million won on average, which corresponded to 25.04% and 8.75% of the average operating profit.

Summary

Policy Study KOR A Study on the Change of Sales Concentration Linked to Platforms Providing On-demand Services

This study analyzes the impact of food delivery service platforms on the restaurant market in South Korea. The appearance of a delivery app leads to many changes in the food service industry. Using monthly sales panel data of restaurants nationwide in 2020 provided by a credit card company, this study examines the revenue growth of restaurants which use a delivery platform. It also relates to sales redistribution among restaurants that use a delivery platform.

The study finds that restaurants which use a food delivery service platform have higher sales than those which do not. During the COVID-19 pandemic in 2020, sales through delivery apps played a role in compensating for the sharp decline of in-person dining at many restaurants. In particular, restaurants with low sales are more likely to raise their position in the market with a food delivery platform. It implies that small restaurant owners should be more actively encouraged to use a delivery platform.

Second, it also shows that sales changes occurred when a restaurant started or stopped using a delivery service platform. Each restaurant can expect a 33.0% sales growth due to the use of delivery apps. In addition, it turns out that restaurants with lower sales have higher expectations of sales growth with a food delivery platform than those with higher sales.

Finally, this study shows sales inequality of entire markets could worsen due to food delivery service platforms. As a result of the Gini index, a food delivery sales component has a more significant contribution to worsening inequality as compared to dine-in sales.

Based on the above empirical analysis, this report can suggest several implications for the growth and distribution of the delivery platform market. Food delivery platforms increase consumers’ convenience and benefit owners of both small and large restaurants. Therefore it is essential to set a policy direction that does not hinder this effect. However, as all restaurants begin to use delivery apps, the larger restaurants are able to increase their market share more than smaller restaurants. It suggests that new policies address ways to maintain a competitive market.

Summary

Policy Study KOR Considering Innovation Competition in Merger Controls

First, this study briefly discusses arguments that it has a limitation to apply results from the extensive literature on the impact of competition on innovation incentives in a horizontal merger context and recent studies that examine more directly the effects of merger on innovation incentives.

Next, taking into account that the recent studies mostly focus on the effects of merger on intensive margin of innovation incentives, this study analyzes the effects of merger on extensive margin of innovation incentives and on R&D project choice. It is shown that (i) a horizontal merger induces merging firms to choose less differentiated R&D projects compared to a situation in which those firms choose their R&D projects independently without the merger if the probability of achieving a successful innovation is relatively high and more differentiated R&D projects in the opposite case; (ii) A horizontal merger can increase the number of R&D projects pursued by merging firms if the probability of achieving a successful innovation is relatively low and R&D cost is relatively high but decrease it if the probability of achieving a successful innovation is relatively high and R&D cost is relatively low. (iii) The impact of the horizontal merger on innovation competition is not clear, and consequently, consumer and social welfare may increase by the merger when the merger intensifies innovation competition.

Finally, this study examines relevant regulations and merger control cases to provide policy implications.

Summary

Policy Study KOR Competitive Bottleneck Platform’s Strategies and Policy Intervention

This research studies a competitive bottleneck market. Reviewing the exiting literature, I try to enhance our understanding of the competitive bottleneck market, and discuss policy intervention tools based on the understanding. I also construct a theoretical model on the business coordination strategy between a platform and seller-side users, to investigate the effect on market competition, market structure, innovation activities, and user welfare. The business coordination, such as exclusive contracts and mergers, can resolve the competitive bottleneck situation, relieve the buyer-side competition, and harm single-homing buyer’s welfare. In the case of merger in which the platform acquires some of the multi-homing sellers, some of sellers can be single-homing. Or seller-side can disappear as the platform internalizes all seller-side users. Then, the (competitive bottleneck) market becomes two-sided single-homing market or the one-sided market. This study shows that the platform has an incentive to adopt the business coordination strategy, to remove the competitive bottleneck and increase the profits.

The policy suggestion in this work can be divided into three groups. The first is industrial policy, the second is regulation policy, and the last is consumer protection. For the industrial policy, I discuss the government assistance to secure users and the innovation support for the sellers, in the view of the long-term productivity improvement. For the regulation / consumer protection, I concentrate on the consumer welfare (or user welfare). When the seller-side users are consist of mid and small size businesses or self-employed businesses, the welfare of seller-side users becomes a policy maker’s concern, as well as the consumer welfare.

To discipline the abuse of market dominance by the competitive bottleneck platform, the large scale modification for the existing regulation tools is needed. In the competitive bottleneck market, the anti-competitive conducts can happen in the competitive side of the market, rather than in monopoly side of the market. Thus, we need new perspectives to regulate the anti-competitive conducts. For the cartel cases, we also need the significant modification in the regulation schemes. The restrained competition on one side can promote the competition on the other side. For the merger investigation, we need to study how the market structure, competition patterns, and user welfare change, as well as the possibility of foreclosing effects and exploitative conducts, which are examined currently.

Summary

Research Monograph KOR Interest Rate Risk, Bank Profitability, Financial Stability and Financial Consumer Welfare

This study largely consists of two parts. The first part analyzes the relationship between market rates and bank profitability while the second examines the relationships between deposit and market interest rates, and that between deposit and loan size. Each part encompasses a micro-theoretic analysis that focuses on imperfect competition in the deposit market, and an empirical analysis that uses Korea’s aggregate-level and bank-level variables.

The theoretical analysis found that as deposit banks gain market power through imperfect competition in the deposit market, the sensitivity of deposit interest rates to market rates becomes very low. That is, when the market rate falls, the loan rate also falls to a similar level but the deposit interest rate does not, which reduces banks’ net interest margin, and leads to a deterioration in profitability. However, when it is additionally considered that banks can endogenously adjust the maturity of their assets and liabilities, a fall in the market rate would not have a meaningful effect on their loan-deposit margin because the deposit interest rate and loan rate have a low sensitivity to the market rate. The fact that the deposit rate has little sensitivity to the market rate means that banks are secure in terms of financing, and as such, they are not very exposed to interest rate risks; even when they handle highly profitable loans (fixed-rate or long-term loans) instead of variable rate or short-term loans. Accordingly, loan rates become less sensitive to market rates.

This theoretical prediction is supported by the empirical analysis in subsequent sections. By analyzing aggregate-level data, a very small negative relationship was found between the market rate and banks’ net interest margin. In addition, a panel cointegration analysis using bank-level data revealed that a 1%p drop in the market rate caused an approximate 0.05%p decrease in banks’ net interest margin. In other words, the profitability of banks is somewhat insensitive to the changes in market interest rates. Recently in Europe and Japan, some have argued that low interest rates could erode banks' profitability, and become a risk to the financial sector. Such an argument, however, could be dispelled by the implications from this study that indicate that the risk would not be as dire as expected.

Additionally, if the market power of deposit banks is strong enough, a fall in the market rate due to a policy rate cut will raise the demand for deposits. When faced with a choice between deposit or non-deposit investment products (financial products, real assets, etc.), deposit and market rates are important considerations for investors. This is because the rate of return on deposits is equivalent to the interest rate of the deposits while the (risk-adjusted) rate of return on non-deposit investment products is closely linked to the market interest rate. However, due to its unique characteristic as a means of payment (settlement), the interest rate of deposits is, in general, lower than the market interest rate. Thus, the difference between the market and deposit rates is negatively associated with the value of the deposits compared to that of non-deposit investment products. And, as the difference decreases, the demand for deposits increases. This study theoretically proves that when the market power of deposit banks is sufficiently high, the resultant decrease in the deposit interest rate is relatively small, even if the market rate decreases. This means that the difference between market and deposit rates narrows, leading to an increase in the demand for deposits.

The second part is again supported by empirical analysis. An analysis of aggregate-level data shows that a decrease in the market rate is closely correlated with an increase in the deposit demand. In addition, a panel cointegration analysis using bank-level data reveals that a 1%p drop in the market rate causes a 5.45% increase in deposits. It is also found that when the deposit, as a source of loans, increases by 1%, the loan increases by 0.73%. These results can be understood to mean that if the monetary authority cuts the policy rate to induce a 1%p decrease in the market rate, deposits will grow, leading to a 3.7% increase in loans. This suggests the existence of a new channel of monetary policy--the deposits channel.

Summary

Working Paper The Airbnb Effect on the Hotel Industry: Evidence from Korea

With rapidly increasing volume of sharing economy transactions, the existing business has shown growing concerns over how the market will be affected. This study examines the issue empirically in the context of accommodation sharing using the data directly obtained from Airbnb and the website data collected by AirDNA during 2010-2014 in Korea. We first examine how hotels' revenue and operations are affected by the introduction of Airbnb in Korea using a reduced-form analysis and find a negative impact on revenue and room rate, but not a significant effect on occupancy rate. We then estimate a structural model of the demand for accommodation and find that hotels become relatively less attractive with the increase of Airbnb supply. However, an additional analysis of hotel review ratings shows no significant change in the quality of hotel services with Airbnb growth, rebutting the argument that hotel accommodation quality may be lowered as a response to competitive pressure from cheap options available on Airbnb. Overall, we conclude that hotels have responded to Airbnb growth by lowering prices, resulting in the decrease in revenue, but they do not appear to have degraded their service quality.

Summary

Policy Study KOR Welfare Impacts of the Renewable Portfolio Standard in Korea

This study evaluates the policy goal of ‘renewable energy 3020’, raising the proportion of renewable power generation to more than 20% by 2030 through staged strengthening of the Renewable Portfolio Standard (RPS), compared to other alternative policies. The analysis focuses on the business-purposed power supply that is subject to the RPS, where self-consumption generation in households is excluded. We propose a tractable equilibrium model that provides a structural representation of Korea’s electricity market, including its energy settlement system and renewable energy certificate (REC) transaction system. Arbitrage conditions are used to define the core value of REC prices to identify relevant competitive equilibrium conditions. The model considers R&D investment and learning effects that may affect the development of renewable energy technologies.

In the model, two periods are considered: ‘the period in which knowledge related to renewable energy technology development accumulates’ and the ‘period in which technology development is realized due to accumulated knowledge’. The model is parameterized to represent the current situation as the first period and the future situation, in which the renewable energy 3020 is implemented, as the second period. The 2016 raw data and forecasts in the 8th Basic Plan for Long-term Electricity Supply and Demand (2017~2031), respectively, are used as representative figures for each period. The model is then simulated for alternative scenarios such as renewable energy 3020 (baseline scenario), repeal of RPS, previously planned RPS, optimal RPS, production subsidy, and nuclear power reduction under RPS.

The result shows that in the baseline scenario the retail electricity price is dropped by 4.1% in the second period relative to the first period. Also, in the second period the REC price is hugely reduced but greater than 0, meaning that the RPS is still binding. Strengthening the RPS in the second period leads to the expansion of R&D investment in the first period, thereby contributing the reduction of renewable generation costs in the second period. In consequence of learning-by-doing and technological innovation, in the baseline scenario the second-period generation cost of solar power is reduced by 24.7% and that of wind power is reduced by 17.3%.

As to the welfare effects, it turns out that the baseline scenario yields a higher welfare level than the RPS abolition scenario. Specifically, compared to the case of its absence, the introduction of RPS increases the retail electricity price in both periods. At the same time, the overall welfare, despite the reduction of consumer surplus, is improved because environmental externality costs are reduced owing to shrunk nonrenewable power generation. The baseline scenario has a higher welfare level relative to the scenario of past RPS schedule, and the welfare can be further enhanced from the baseline scenario by additional strengthening of the RPS. The ranking of welfare effects by scenario is maintained throughout sensitivity analysis.

It is confirmed that renewable production subsidies, corresponding to REC prices in the baseline scenario, can achieve the same level of renewable power generation as in the baseline. On the other hand, subsidies less increase in retail electricity prices. Because of the high financial burden, however, the subsidies are inferior to the RPS in terms of overall welfare. The simulation is also conducted for the case in which the second-period aggregate capacity of the nuclear power plants is forced to be cut by 5% from the baseline scenario. It is found that despite the reduction in the accident risk costs of the nuclear power, welfare is lowered compared to the baseline because there is a dominating increase in environmental damages due to the expansion of LNG power generation.

Summary

Policy Study KOR Study on Franchise Contract and Franchise Market System

This paper analyzes how franchise contract conditions are influenced by market structure as well as how they affect producer surplus, utilizing the Korean franchisor’s Information Disclosure Data for 2014-2016.

The results reveal that franchise fees tend to increase in line with the increase in the number of direct stores or business period. This implies that it would be reasonable to check whether the franchise fee is excessive compared to the amount of reputation capital rather than the absolute level of franchise fee.

It was also found that the larger the royalty discount in the purchase contract, the higher the initial royalties. Outwardly, although it can seem to be a royalty discount, it can be a practice to induce a raw material purchase contract by initially setting a high royalty rate then lowering it after the purchase contract is signed.

For the effect on producer surplus, the results show that an increase in franchise fees and royalties negatively affect franchisee’s operating profits but positively affect that of the franchisor’s, leading to conflicts over the distribution of the economic value added.

Based on the findings, this paper proposes policy directions that include; reinforcing the contents in the information disclosure book; improving of royalties and raw material contracts and; strengthening the qualification requirements for franchise businesses.

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