[Why&Next] Why the Government Is Cracking Down on the 'Oligopoly Structure' Industry

Need to Calm Public Dissatisfaction Amid Soaring Interest Rates and Prices
Government Has Essentially Created Oligopolies in Telecom and Finance
"Prices Should Be Left to the Market... Government Support for Vulnerable Groups"

[Image source=Yonhap News]

President Yoon Suk-yeol, at the Emergency Economic and Livelihood Meeting held on the 15th, mentioned that "the telecommunications and financial sectors have a strong public goods nature," calling for shared sacrifices to stabilize prices. Following this, on the 27th, the Fair Trade Commission, known as the 'economic prosecutor,' launched on-site investigations into the three major mobile carriers and banks.

Since the 15th, government officials including Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho have been making successive remarks intervening in the financial, telecommunications, and food sectors. Key economic ministers competitively issued strong statements such as "The banks' business methods are predatory" (Lee Bok-hyun, Financial Supervisory Service Chief, on the 17th), "Did you raise liquor prices just because taxes went up a little?" (Choo Kyung-ho, Deputy Prime Minister and Minister of Economy and Finance, on the 22nd), and "The oligopolistic structure in the financial and telecommunications sectors has become entrenched" (Han Ki-jung, Fair Trade Commission Chairman, on the 23rd). HiteJinro and others officially announced plans not to raise product prices. This came just a day after the Ministry of Economy and Finance and the National Tax Service reportedly began an on-site investigation of liquor companies. The same applies to bottled water companies like Pulmuone.

Shifting Criticism to the Industry, Boosting Approval Ratings

The public is feeling a heavy burden from soaring interest rates and prices. Since last year, rapid interest rate hikes have nearly doubled interest burdens. Due to Russia's invasion of Ukraine, energy and grain prices surged, causing electricity and gas bills to rise significantly, along with prices of daily necessities and dining out. Meanwhile, banks and the petroleum industry celebrated record-high net profits with bonus parties.

While the majority of the public struggles, some sectors are holding money parties, inevitably increasing dissatisfaction. The Yoon Suk-yeol administration did not miss this point. From the government's perspective, a shift in the political situation is needed before the parliamentary elections in April next year, but the economy shows no signs of recovery, and prices are unlikely to be easily controlled. Unless the Russia-Ukraine war ends, energy prices will remain high. With prices not calming down, high interest rates will persist not only in the U.S. but also in South Korea until early next year.

In this situation, a 'public enemy' appeared. The banking and telecommunications industries became the first targets, followed by the food industry joining the target list. Incidentally, since President Yoon began criticizing the industry on the 15th, his approval rating according to Realmeter rose to the 40% range in the third and fourth weeks of February. This was a rebound from the mid-to-late 30% range that had been maintained since the first week of January.

A financial sector official said, "To soothe the public mood disturbed by high prices such as heating bills, the government is cracking down on banks and telecommunications companies, over which it holds licensing authority," adding, "If excessive interest rate spreads are a problem, then the government should also hold the petroleum companies accountable, which have made huge profits due to soaring energy prices."

Is President Yoon's Criticism of the "Oligopoly System" Justified?

President Yoon and the government criticized the oligopolistic structure in the financial and telecommunications sectors. The criticism is that these oligopolistic industries ignore consumers' difficulties and only enrich themselves. This tone is markedly different from the early days of the Yoon administration, which emphasized corporate autonomy and market economy.

Is the criticism of the oligopoly system justified? In a capitalist economy, it is common for markets to converge into oligopolies as they mature. Usually, two, three, or four companies share most of the market in most industries. Why does the market converge into an oligopoly as it matures? Because when too many companies compete in a limited market, it becomes difficult to secure adequate profits, and companies lacking competitiveness or making major mistakes are eliminated.

While it might seem that more competition among companies would lower prices and benefit consumers, this is not always the case. Companies need a certain level of adequate profit to invest heavily, achieve economies of scale, increase efficiency, and provide better products and services to consumers. Hyundai Motor Group, based on its overwhelming domestic market share, was able to enhance global competitiveness and invest simultaneously in future car technologies such as electric vehicles and hydrogen fuel cell vehicles. This is something that Japanese automakers in an oligopolistic competitive system envy.

Let's look at telecommunications and banks. In the 1990s, when the government started telecommunications services, it licensed five companies: SK Telecom (011), KT Freetel (016), Shinsegi Telecom (017), Hansol Telecom (018), and LG Telecom (019). Later, Shinsegi Telecom and Hansol Telecom, which were unprofitable, merged with SK Telecom and KT Freetel respectively, forming a three-company system. The banking sector, which had a five-major commercial bank system (Choheung, Commercial, Jeil, Hanil, Seoul), became insolvent due to the 1997 foreign exchange crisis, prompting the government to pursue a bank consolidation policy. Banks serving ordinary citizens, such as Kookmin Bank and Housing Bank, which were shielded from corporate insolvency effects, merged under government leadership to become Kookmin Bank. The insolvent Commercial Bank and Hanil Bank merged to form Hanbit Bank (now Woori Bank). Seoul Bank merged with Hana Bank, which later acquired Korea Exchange Bank in the 2010s. Choheung Bank merged with Shinhan Bank. In fact, the oligopoly system was essentially created by the government.

Criticism of Domestic Companies Is Inevitable in an Oligopoly System

What is the common characteristic of the industries criticized by the government, such as telecommunications, finance, food, and liquor? They are all typical domestic industries. While oligopoly systems commonly appear as markets mature, they inevitably have a competition-restricting nature. This is why the Fair Trade Commission investigates cartels, abuses of market dominance, and conducts monopoly and merger reviews.

Neither the public nor the government criticizes companies facing fierce global competition. No one complains even if Samsung Electronics, LG Electronics, or Hyundai Motor Company give out large bonuses. But the story is different for domestic industries. They benefit significantly from tariff barriers or non-tariff barriers (such as public sentiment) in competition with foreign companies. Telecommunications and finance also have high entry barriers due to regulations. The possibility of restricted competition is much higher. If an oligopoly structure is formed in domestic industries, criticism is inevitable when these companies receive large bonuses or raise product prices significantly. That is inevitable.

"Government Intervention Should Not Extend to Price Functions"

Then how should we view the government stepping in to impose excessive price restrictions? No matter how legitimate the government's intention to correct the harms of oligopoly and promote competition, excessive intervention is often considered undesirable in a market economy. A private research institute official said, "When the government intervenes in prices in a market economy, resource allocation is inevitably distorted. In the case of banks, if interest rates are suppressed too low, loans may be extended to people who should not receive them," adding, "The market's price function should work well, and the government should strengthen its support role for socially vulnerable groups who suffer significant harm." Also, companies raised prices citing increased production costs such as raw materials and energy, and if the government suppresses this, only temporary effects will appear. During the past developmental dictatorship era, prices of various products were fixed to prevent increases, leading to reduced volume or quality deterioration. While it may not reach that extent now, some form of side effects will appear.

Although the Fair Trade Commission has launched investigations into the telecommunications and banking industries, there are concerns that these may end up as superficial 'dusting off' investigations without significant results. Over the past five years, the Fair Trade Commission investigated collusion among the three major mobile carriers and their affiliates but found no evidence. It also investigated allegations of collusion on negotiable certificate of deposit (CD) interest rates among six banks from 2012 to 2016 but closed the review process without uncovering any wrongdoing.