[Why&Next] Coupang Faces Fair Trade Commission Trial for 'Algorithm Manipulation'

To Drive Total Revenue, Expand Profitable PB Business
Employee Mobilization for Review and Search Ranking Manipulation
Sanction Level to Be Decided Next Month

The competition authorities' final decision targeting Coupang's 'self-preference' will be announced next month. This measure directly targets Coupang's blatant preferential treatment of its private brand (PB) products. The competition authorities believe that Coupang, which has grown to be the undisputed number one in the domestic e-commerce market, used its dominant position as the ultimate 'gap (甲)' to deceive consumers and distort fair competition. Coupang denies the main allegations such as algorithm manipulation, but there is also speculation that Coupang's claims could rather provide justification for enacting the Platform Competition Promotion Act.

The Korea Fair Trade Commission (KFTC) recently delivered a review report stating that Coupang violated Article 45, Paragraph 4 (Unfair Customer Inducement) of the Monopoly Regulation and Fair Trade Act. Although it did not specify the exact amount, the report included opinions to impose fines and refer the Coupang corporation to the prosecution. Based on this review report, two plenary meetings will be held by early next month to make a final decision on the level of sanctions against Coupang.

The KFTC raised two major issues in the review report. One was the business practice of mobilizing employees to post fake reviews (purchase feedback) on its own products, and the other was the manipulation of the search algorithm involved in this. Coupang is accused of producing low-priced copy products similar to supplier products that sold well on its platform, raising prices significantly once sales increased, and systematically mobilizing its employees to post reviews on these products. This business practice is said to have continued for at least five years since 2019. In the process, Coupang is also accused of manipulating the search algorithm to boost the sales rate of its PB products. Although the basic product search setting, 'Coupang Ranking Order,' claims to determine the exposure order of search results based on objective criteria such as sales volume and low price, the KFTC concluded that the algorithm was artificially adjusted to display Coupang's PB products at the top.

In the online space, the exposure order of search results is directly linked to sales. Although nearly infinite products flood in real-time, the number of products that can fit on one screen is very limited. Most products sold by Coupang are consumer goods with intense price competition. A representative from a major domestic law firm pointed out, "It will be difficult to justify that Coupang favored its own products while deceiving consumers into thinking that various merchants' products were equally exposed when the perceived product differentiation is low." He criticized that the platform company, which should act as the market's referee, manipulated the game rules (algorithm) in its favor while playing as a player.

Coupang's PB business accounts for far less than 10% of sales but is a profitable core business driving overall profitability. This is why Coupang, under pressure to improve profitability around its NASDAQ listing, has aggressively expanded its PB business. Since its founding in 2010, Coupang had been in the red for years, but due to the expansion of new businesses such as the PB business, it achieved its first annual operating profit surplus (617.4 billion KRW) last year and recorded a record-breaking sales revenue of 31.8298 trillion KRW. Coupang, which rapidly expanded its business, entered the large business group category for the first time in 2021 and surged to 45th place in the business world ranking with total assets of 11.107 trillion KRW (as of the end of 2022).

Coupang denies the allegations raised. A Coupang official argued regarding the algorithm manipulation allegations, "Is it a problem to show customers the products they want in the way they want?" and claimed, "(Our business practice) is no different from large supermarkets displaying their PB products at the entrance stands." They argued that Coupang PB products appearing at the top of search results is a result of many people searching for them, not due to any 'technical vested interest.' They claim that the 'customer-desired results' being especially favorable to Coupang is a coincidence, but it is unlikely to gain legal persuasiveness. Moreover, the rebuttal that 'product display is the foundation of the distribution business' is criticized for misleading consumers who believed the search results were objective and for discriminating against competitors, thus distorting fair competition.

Algorithm manipulation is not unique to Coupang. For years, giant platform companies such as Naver and Kakao have been caught by the KFTC for manipulating algorithms in their favor under the name of innovation. Naver was fined 26.7 billion KRW in October 2020 for artificially adjusting the priority exposure algorithm in shopping and video search services for years. Kakao Mobility was fined 27.1 billion KRW for manipulating dispatch algorithms to favor certain calls. Amazon, a U.S. e-commerce company modeled after Coupang's business model, was revealed during the U.S. Federal Trade Commission (FTC) antitrust investigation to have artificially controlled prices through algorithm manipulation called the 'Nessie Project.'

These platform companies enjoyed monopolistic market positions while shouting innovation, but ultimately caused industry-wide backlash by engaging in unfair practices such as self-preference and blocking multi-homing, leading to controversies over abuse of power and fairness. If consumer voices demanding 'fairness in the winner-takes-all platform market' grow stronger due to the Coupang case, it could strengthen the enactment of the Platform Competition Promotion Act, which had been reconsidered due to industry opposition. Especially since Coupang has decided to significantly raise the monthly fee for Coupang Wow Membership from 4,990 KRW to 7,890 KRW, consumer sentiment may turn unfavorable toward Coupang.