[Opinion] Competition with Platform Companies

[Shin Jin-young, President of the Korea Corporate Governance Service and Professor at Yonsei University School of Business]

Last June, the U.S. House Judiciary Committee passed four bills that strongly regulate platform companies through a highly unusual bipartisan agreement. These bills target Google, Apple, Facebook, and Amazon, commonly known as GAFA, and can be understood as legislating strong and comprehensive regulations on platform companies, which have long been considered a blind spot in competition regulation. Earlier, the EU had strengthened competition law enforcement against large platform companies like Google in the digital market to create a fair competition environment. Since last year, recognizing the limitations of this approach, the EU has introduced ex-ante regulations on large platform companies by proposing the Digital Markets Act and the Digital Services Act.

The digital platform companies currently subject to regulation are defined as major online hubs where transactions and information exchanges occur between different groups. These companies exhibit multi-sidedness, satisfying the demands of two or more distinct customer groups that require mutual connection, and indirect network effects, where the utility increases as the size of one customer group grows in relation to another. Due to these characteristics, especially network effects, a few companies are likely to hold market dominance, and it is difficult for new entrants to penetrate the market. Consequently, the possibility of competition restriction and abuse of market dominance by these large platform companies is known to be very high.

In South Korea, Naver and Kakao are representative large platform companies. Of course, compared to GAFA, they have not yet secured market dominance strong enough to require regulations as stringent as those in the U.S. legislative cases. Even in online commerce, companies like Coupang, Shinsegae, and Naver compete, and in delivery apps, multiple companies such as Baemin, Yogiyo, and Coupang Eats respond to customer demand. However, since the COVID-19 pandemic, as platform companies have increasingly mediated transactions between vendors and consumers across all industries, both in scale and in the range of services, the need for appropriate regulation has also emerged. To establish fair competition in the platform market early, the Korea Fair Trade Commission promoted the enactment of the “Act on the Fairness of Online Platform Intermediated Transactions” and the revision of the “E-commerce Consumer Protection Act” in 2020. The former primarily aims to prevent unfair practices exploiting the superior position of platform companies. The latter seeks to expand the legal responsibility of platforms in consumer protection, aiming to eradicate acts such as providing unfair terms and conditions or evading responsibility for consumer damages.

Robert Gordon, a leading economic historian, raised the “productivity paradox” in his work “The Rise and Fall of American Growth,” arguing that the economic ripple effects of IT diffusion are limited, resulting in sluggish productivity growth in the U.S. economy since the 1970s, which caused a significant stir in the economics community. In response, Philip Aghion, in his book “The Economics of Creative Destruction,” points to large platform companies as a major cause of the productivity paradox. These companies secure key intellectual property rights necessary for innovation and set high entry barriers by proactively acquiring and merging with startups. As already well known through Schumpeter and others, productivity improvement and resulting economic growth occur when startups innovate and overthrow established companies, but the current situation does not allow this. In South Korea, platform companies have not yet reached the level of market dominance seen in the U.S. However, it is hoped that proactive policies to secure competition among platform companies will establish a fair economy in the digital economy sector, and through the success of the Korean New Deal economy, lead to growth and development of the Korean economy.

[Shin Jinyoung, President of the Korea Corporate Governance Service and Professor at Yonsei University Business School]