KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Policy Study KOR A Study on the Superior Bargaining Position of Digital Platforms

This report analyzes the superior bargaining position of digital platform companies and their exploitation of this advantage. Two key characteristics underpin this position: (i) their advanced capacity for data collection and utilization compared to traditional firms, and (ii) their role as rule-setters within the marketplaces they have established.

Existing literature identifies three primary sources of their bargaining power: (i) information asymmetry, (ii) demand-side monopoly power, and (iii) hold-up arising from relationship-specific investments. Due to their superior data collection and utilization capabilities, platform firms are better positioned than traditional firms to exploit information asymmetry, thereby abusing their bargaining position. Additionally, the dynamic nature of platform markets often magnifies demand-side monopoly power. Despite a small market share, platforms can still exert significant market influence depending on user behavior. However, hold-up concerns over relationship-specific investments are less pronounced because platforms, which typically offer standardized terms of trade, find it challenging to enforce customized contract terms tailored to individual business users. Under customized contracts, the likelihood and severity of exploitation through hold-ups become most acute.

Theoretical model analysis reveals that platform firms may have incentives to refrain from using even the information they have acquired to capitalize on their superior bargaining position. Regarding relationship-specific investments, the inability to adopt customized contracts can encourage business users to invest despite the absence of a binding commitment mechanism―in sharp contrast with existing studies on relationship-specific investments and investment delays.

In concludion, this analysis highlights several critical issues that must be addressed to improve the short-term effectiveness and long-term consistency of regulatory measures targeting the abuse of superior bargaining positions by platform firms. First, discussions are needed on victim identification and the impact on the trade order. Current legal precedents requiring the identification of specific victims could hinder efforts to regulate the abuse of superior bargaining positions by platforms. For platforms that set rules for a wide range of counterparties, mandating counterparty specification could significantly limit the regulatory scope for addressing the abuse of superior bargaining positions. In the short term, therefore, it is advisable to alleviate the burden of identifying specific counterparties while still requiring evidence of adverse impacts on the trade oreder, consistent with the Geumbo Development precedent. Moreover, given the multi-sidedness of digital platforms, it is important to consider efficiency-enhancing or pro-competitive effects that may arise in adjacent markets or on the opposite side of the platform when examining instances of superior bargaining position abuse. In the long term, it would be preferable to transition toward regulation through competition law enforcement, such as addressing abuses of market-dominant positions. Acts that harm the trade order against unspecified counterparties are inherently subject to competition law. However, the current reliance on market share as a proxy for market dominance should be replaced by direct measure of market power, and legislative reforms, such as amendments to presumptive provisions, may also be necessary. Finally, to deter and promptly detect abuses of superior bargaining positions by platforms, it is essential to establish a dedicated, permanent oversight bodyendowed with the authority to access data or algorithms as needed.

Summary

Research Monograph KOR Empirical Study on the Growth of Korea’s Cultural Content Industry and Policy Implications

This study conducts a comprehensive analysis of the growth dynamics of South Korea's cultural content industry to enhance its competitiveness and support sustainable development. Employing a multifaceted empirical approach, it examines quantitative metrics―such as the number of businesses, employment levels, revenue, and trade flows―across the industry and its subsectors to identify growth trajectories and structural characteristics (Chapters 3 and 4).

Given the industry's complex interdependence with other sectors, this study combines data from the "Special Classification of the Content Industry" (Statistics Korea, Ministry of Culture, Sports and Tourism), the "Korean Standard Industrial Classification (KSIC)" (Statistics Korea), and the "Input-Output Tables" (Bank of Korea). This integration creates a new input-output table that captures 12 subsectors of the cultural content industry (Chapter 5).

The study uses the new input-output table to examine supply, demand, and input structures to illuminate the industry's economic roles and inter-industry linkages. Key metrics―including total output ratio, import dependency, intermediate input structure, and value-added ratio―are compared with other sectors to highlight the distinctive characteristics (Chapter 6). The study further investigates the sector's effects on the broader economy, calculating coefficients for input, production induction, and sensitivity, assessing the sector's overall impact via inter-industry ties and interactions (Chapter 7).

In recognition that individual businesses drive the industry's growth, this study identifies business growth enablers within the CPND framework (Content, Platform, Network, and Device). They include intellectual property ownership, workforce size, operational tenure, market diversification, and digital infrastructure. This analysis highlights the critical impact of IP rights―especially utility patents and copyrights―on competitiveness and revenue growth (Chapter 8).

Moreover, the study systematically evaluates relevant policies through a descriptive statistical analysis of 149 support programs managed by the Ministry of Culture, Sports and Tourism and the Korea Creative Content Agency (KOCCA), focusing on their primary functions and target groups (Chapter 9). Finally, building on the study's findings, key policy directions are proposed: fostering digital adaptability among small and medium-sized enterprises (SMEs), enhancing IP protection in the digital era, diversifying export markets, and addressing regional disparities to ensure balanced development across Korea (Chapters 10).

Summary

KDI FOCUS The Ascent of K-Content: Industry Structure and Growth Drivers

Korea’s cultural content industry has seen rapid growth. Key drivers include improved content quality, a maturing digital ecosystem, and increasingly interconnected business networks. As the industry takes on a more prominent role in the national economy―generating a significant production inducement effect―policy efforts should focus on strengthening copyright protection and enforcement, advancing digital transformation among small and midsize firms, and diversifying export markets through deeper industry linkages.

- This paper analyzes the structural changes and growth trajectory of Korea’s content industry, assesses its economic impact, and identifies key drivers of firm-level growth.

- The industry composition is shifting toward digital content production and online distribution.

- Knowledge information has been the largest contributor to sales growth in the content industry.

- Content exports reached $12.45 billion in 2021, continuing a streak of record highs since data collection began.

- Rising domestic production capacity and declining reliance on foreign content have boosted net exports of K-content, contributing to a surplus in intellectual property trade.

- The content industry shows higher self-input coefficients than most service industries and even some manufacturing industries.

- The content industry has grown through close integration with the diverse industries comprising the CPND value chain.

- One unit increase in final demand in the content industry generates 1.572 units of output across all industries―64% within and 36% in other sectors.

- In 2020, the total production inducement effect of the content industry amounted to 113.7 trillion won.

- The content industry’s power dispersion index ranks 19th of 33, placing it in the mid-range.

- The content industry demonstrates aboveaverage sensitivity, highlighting the need for industrial and policy responses to external market changes.

- K-content has solidified its position in global markets through high production quality and artistic merit.

- Changes in CPND factors can also significantly influence the growth of content firms.

- Copyrights increase firm revenue by 11.6%, playing a key role in revenue generation by protecting creative works.

- Development of platforms, networks, and digital devices has also contributed significantly to growth in the content industry.

- Expanding sales channels improves market access and exposure to diverse customer segments. Overseas expansion helps broaden the consumer base and stabilize firm revenue.

- Engagements with content firms generate over twice the revenue growth compared to noncontent firms.

- Copyright acquisition and protection should be embedded across the entire support system for content firms.

- Promoting digital transformation―paired with measures to enhance adaptability―can help steer policy in a more strategic direction for small and midsize content firms.

- The government should systematically develop region-specific entry strategies through the K-Content Export Council.

Summary

KDI FOCUS Path to National Champions: Transforming Support Policies for Small- and Medium-Sized Enterprises (SMEs)

South Korea’s ‘national champion policy,’ designed to foster global enterprises, has yet to deliver measurable outcomes in sales and productivity, suggesting inefficiencies in resource allocation linked to ‘the risk of picking winners.’ Accordingly, the incentive structure of growth policies for Small- and Medium-Sized Enterprises (SMEs) needs an operational shift, moving away from conventional subsidy assistance toward a bespoke model that integrates private investment, consulting, and networks to address their business challenges collaboratively. Furthermore, in order to enhance policy accountability and effectiveness, it is crucial to consolidate support details and performance outcomes while ensuring transparency through public disclosure.

- Amid intensifying competition for technological dominance, advanced countries are stepping up the reintroduction of targeted industrial policy to concentrate support in specific industries or firms.

- Korea provides substantial subsidies to firms through its national champion policy, but studies on its effectiveness remain limited.

- This study analyzes the effectiveness of Korea’s national champion policy and offers recommendations for improvement by comparing its operational approach with those of other countries.

- Korea’s flagship national champion policy program, World Class 300, provided targeted annual subsidies to 30~56 firms selected through a government-led process.

- The declining share of high-growth firms led to a large drop in the number of firms satisfying WC300’s sales growth criterion, making it harder to identify eligible firms.

- An analysis of WC300 outcomes reveals no significant impact on sales, value-added, or productivity, suggesting that resources may have been allocated to firms misaligned with the project’s objectives.

- Korea’s national champion policy aims to foster innovation and promote exports among SMEs to drive growth and job creation.

- However, concentrating resources on less competitive firms through selective support risks undermining economic efficiency and distorting market dynamics.

- Relational support is likely more effective than transactional support for high-potential firms.

- Effective business growth support requires tailored assistance that meets the diverse needs across the growth stages of individual firms rather than focusing on a single activity.

- The time has come for Korea to shift gears in its national champion

- To enhance the effectiveness of the national champion policy, its framework―including firm selection and support measures―should transition to a private-sector-led approach.

- Enhancing policy accountability and effectiveness requires centralized management of support details and performance data alongside transparent public disclosure.

- Given the low incentives for actively restructuring government support projects, institutionalizing independent evaluations is crucial for improving future outcomes.

- New policy initiatives should operate systematic pilot programs to enhance effectiveness.

Summary

KDI FOCUS Protecting Customer Funds for Emerging Financial Products

Emerging financial products driven by innovation, such as virtual assets and simplified payment services, introduce both new conveniences and in-transaction risks to customer funds. Despite regulations on segregating customer funds already in place, full compliance by businesses with these rules is unlikely, especially with insolvency on their horizon. This paper proposes a new protection framework that bolsters the safety of new financial products and reduces funding pressures for the compensation scheme.

- New financial products emerging through innovation offer novel benefits but may also expose customers to risks in managing their funds.

- A protection system for emerging financial products can lay a strong foundation, serving as a key safety net to support reliable financial innovation.

- Customer funds for new financial products include prepaid balances, virtual asset deposits,

- P2P lending deposits, and funeral service prepayments.

- The current volume of customer funds associated with new financial products is substantial, at about 18 trillion won, and is expected to grow further, driven by advancements in digital finance and population aging.

- There have been numerous cases where businesses misappropriated customer funds for new financial products and later went bankrupt.

- Although fund segregation regulations for customer funds are in place, firms on the verge of bankruptcy are highly likely to violate them, and several other limitations persist.

- While fund segregation regulations serve a preventive function, the best of such precautions cannot eliminate all incidents, necessitating a post-incident protection system.

- In the direct protection scheme, firms pay insurance premiums in advance, and KDIC protects customers in the event of business insolvency.

- However, the direct scheme applies uniform insurance rates regardless of fund segregation in contrast to the fundamental insurance principle of premiums proportional to risk.

- In the indirect framework, firms do not pay insurance premiums, and KDIC safeguards only the funds segregated in banks in the event of bank failure.

- The indirect approach only protects segregated funds, leaving customers unprotected from violations of segregation rules, resulting in reduced protection effectiveness.

- The proposed hybrid scheme indirectly protects customer funds segregated in banks while directly safeguarding all other customer funds.

- This hybrid protection system ensures high effectiveness by safeguarding all customer funds and keeps

- insurance premium burdens low for firms and customers, as firms are incentivized to deposit most customer funds in banks.

- The hybrid protection system addresses risk transfer, in which a bank’s failure can trigger a firm’s insolvency.

- Early detection of firms facing liquidity risks is enabled by the hybrid proposal.

- KDIC’s burden under the hybrid option is not expected to be substantial.

- While the indirect protection system is easy to implement, the hybrid option requires substantial changes to the existing framework, making immediate implementation challenging.

- Recently, major developed countries have expanded the coverage of deposit insurance institutions beyond traditional deposits to include a wide range of financial and quasifinancial services, aiming to responsibly foster financial innovation.

- This study builds on such global trends to propose protection measures for customer funds in new financial products.

- The proposed protection system, with its inclusive nature, can serve as a comprehensive framework to protect and foster future innovation by capturing new financial products within its regulatory scope.

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 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

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 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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