Case Study : Refusals to deal (Korea) 13 October 2006 By Sun, Joong-Kyu Korean Fair Trade Commission

Contents  Theoretical Discussion on Refusal to deal  Korean Regulations on Refusal to deal  Case I : Refusal to supply hot coil to a competitor  Case II : Refusal to deal with new liquor wholesalers  Case III : Refusal to supply essential goods to a competitor

1. Theoretical Discussion on Refusal to deal General refusal to deal - Under market economy, undertakings basically have the freedom to choose their transaction partners. - ∴ An undertaking is free to choose whether or not to start/continue transaction with other undertakings & to choose whom to deal with. Competition-restrictive refusal to deal - But, depending on circumstances, refusal to start transaction or suspension of transaction may restrict competition in the market concerned, by unfairly making business activities of a transaction partner difficult.

Cases of competition-restrictive refusal to deal - Assume that there is only one steel sheet maker (A) - Monopolist A supplies steel sheet to car makers b, c, d - If A refuses to supply steel sheet to b without rational reasons, b will find it difficult to run manufacturing business → in the end, exit the car market - Refusal of A to deal with b substantially reduces competition in the car market. - Decrease in competition ultimately affects consumers of cars by reducing pressures on c & d to cut price or enhance service. 1. Theoretical Discussion on Refusal to deal

The need to sanction competition-restrictive refusal to deal - In principle, damage of the party concerned in general refusal to deal is redressed by civil lawsuit. - But, individual remedies by civil lawsuit are insufficient to redress harms of such refusal to deal on the entire efficiency of market & on consumer welfare. - ∴ For certain cases, refusal to deal need to be regulated by the Monopoly Regulation and Fair Trade Act (MRFTA); in order to prevent or correct a decrease in the entire efficiency of market/in consumer welfare that can by caused by refusal to deal 1. Theoretical Discussion on Refusal to deal

The MRFTA regulations on refusal to deal are conducted in two aspects. - Abuse of market-dominant position (Article3-2 of the Act) : regulate refusal to deal of a market dominant firm - Unfair business practices of general undertakings (Article23) : regulate refusal to deal of general undertakings without market- dominance 2. Korea Regulation on Refusal to deal

Abuse of market-dominant position - A market dominant firm : a company with enough market power allowing it to unilaterally determine trading terms such as the price and supply of products. · a single firm exceeds 50 percent · the combined market share of the top three firms is more than 75 percent. - Prohibit a market dominant firm from unfairly refusing to deal with a particular undertaking, making business activities of the undertaking difficult by dramatically limiting the volume/ content of the traded goods & service (Investigation guideline) 2. Korea Regulation on Refusal to deal

2. Korean Regulations on Refusal to deal Unfair Business Practice - The MRFTA regulates refusal to deal as representative unfair business practice (Enforcement Decree) - The most important criteria to determine whether or not refusal to deal violated the MRFTA; whether or not competition is restricted in market (Investigation guideline) - Determine competition restraint, comprehensively based on; · Whether or not goods/service in refusal to deal are essential for the transaction partner to run its business (if not essential, the effect of restraining competition is low).

· Whether or not the refused partner can easily find alternative transaction partner (If so, the effect of restraining competition is low). · Whether or not a particular undertaking came to have difficulties in its business activities &, as a result, competition was substantially reduced in the market concerned (If the undertaking does not have difficulties in doing business, the effect of competition is low). · Whether or not refusal to deal made the market entry of one ’ s competitors (including potential competitors) difficult (if the market entry is not difficult, the effect of restraining competition is low). · Whether or not refusal to deal was used as a means to force behaviors prohibited by the MRFTA (ex) maintenance of resale prices, vertical restraint, concerted action, etc.) 2. Korean Regulations on Fidelity Discounts

Facts of the case - Company P, the domestic monopolist producer of hot coil, refused to supply hot coil to company H (which is in competition with P in the market for cold rolled steel sheets produced from hot coil) without clear reasons, despite several times of request from H for the supply. ※ P is the sole producer of hot coil in Korea, with 79.8% of market share as of (The rest of them are imports.) ※ Cold rolled steel sheets are used for making car bodies. Market share as of 2000: company P 58.4%, company D 13.7%, company H 11.1%, company Y 7.9% 3. Case I : Refusal to supply hot coil to a competitor

The KFTC ruled that the behavior of P is abuse of market dominant position which obstructed business activities of other companies through refusal to deal & imposed surcharges, orders of corrective measures and public announcement on newspaper. Ruling of the KFTC (grounds of illegality recognition) - The behavior of P is to maintain/strengthen its dominant position in the market for cold rolled steel sheet by using its dominance in hot coil market. · An intention to exclude competitors by not supplying hot coil which is the major raw material of the competitors in the cold rolled steel sheet market. 3. Case I : Refusal to supply hot coil to a competitor

- Company H (the refused party) had no choice but to import hot coil due to the behavior of P. Thus business activities of H became difficult due to additional cost for import, uncertainty of transaction, etc. - Domestic purchase of the said product became impossible, leading to weakened buying power (when importing the said product) & unfavorable condition (when negotiating transaction terms). Consequently, negative for national economy 3. Case I : Refusal to supply hot coil to a competitor

Argument of company P - Hot coil used for cold rolled steel sheet is not a goods for external sales but intermediate goods for making its own cold rolled steel sheet. - Refusal to supply hot coil was due to its lack of supply capacity, not the intention to exclude competitors. P filed an appeal to the High Court against the decision of the KFTC. - The High Court ruled in support of the decision of the KFTC. - Currently pending in the Supreme Court 3. Case I : Refusal to supply hot coil to a competitor

Facts of the case - In Busan, H Beer (beer) and D distilling (soju) have dominance in the markets for beer & soju, respectively. They refused to supply beer & soju to new liquor wholesalers who supplied beer & soju to retailers at lower prices than other wholesalers at the request of Korean Liquor Association. ※ Share of H Beer in the beer market in Busan: 83% ※ Share of D Distilling in the soju market in Busan: 87% 4. Case II : Refusal to deal with new liquor wholesalers

KFTC ruled that the behavior of H Beer and D distilling is unfair business practice as unfair refusal to deal,under the MRFTA & imposed corrective orders, surcharges and orders of public announcement on newspaper. Ruling of the KFTC (grounds of illegality recognition) - The behavior of H Beer and D distilling has an effect of, in effect, blocking price competition in the wholesale market for liquor in Busan. - No rational reasons for the refusal to deal, because the volume of production & inventory of H Beer and D distilling is not insufficient to the extent of refusing supply. 4. Case II : Refusal to deal with new liquor wholesalers

- Refusal of H Beer & D distilling to supply Beer/soju made business activities of new wholesalers extremely difficult, in effect, blocking their entry into the market. Argument of H Beer & D distilling - It was an inevitable refusal to supply, for the purpose of stable maintenance of distribution channel. - It was the minimum necessary measure to prevent low prices from leading to a decrease in sales of the existing wholesalers; ∵ This could make it difficult for them to retrieve bonds. 4. Case II : Refusal to deal with new liquor wholesalers

Rebuttal of the KFTC - It is too exaggerating to say that sales at low prices by small-scale new wholesalers would disrupt the liquor distribution channel. - Rather, refusal to deal in this case has greater effect of making monopolistic & oligopolistic structure rooted in the liquor wholesale market. - No big correlation between an increase & decrease in receivables and an increase & decrease in sales. - Hard to see that small-scale new wholesalers would decrease sales of the entire liquor wholesalers in Busan to the extent that they can not repay their debt. 4. Case II : Refusal to deal with new liquor wholesalers

Facts of the case - H (a telephone company) refused to list the phone numbers of subscribers of A (a new competitor) on the phone book published by itself. - Had its affiliated company (another company publishing a phone book) refuse to list the phone numbers of A ’ s subscribers. ※ Market share of the phone book published by H: 83% ※ Market share of H in the market for local call services: 98.2% 5. Case III : Refusal to supply service to a competitor

KFTC determined that the refusal of company H to list phone numbers of its competitor A ’ s subscribers is unfair business practice(as unfair refusal to deal) & gave corrective orders to H. Ruling of the KFTC - A Phone book helping subscribers identify phone numbers is essential service for local call operators. · For company A (a new entrant with low market share), in particular, listing of subscribers ’ phone numbers is a very important means of competition. 5. Case III : Refusal to supply service to a competitor

- Company A can publish phone books. However, a phone book only composed of its own subscribers ’ phone numbers does not have significant meaning, since A is a new entrant with just 1.8% of market share. - No rational reasons for H to refuse listing the numbers; ∵ It costs company H little to list phone numbers of company A’s subscribers. Rather, it offers convenience to the phone book users. - Consequently, the behavior of H can be seen as an effort to maintain/strengthen its market dominance by excluding new companies in the domestic market for local fixed line phone service. 5. Case III : Refusal to supply service to a competitor

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