Company
LOGO
Case Study :
Price fixing and Market Allocation
of Flour Mill Companies in Korea (2006)
Hang-Lok, Oh
E-mail : [email protected]
Deputy Director, Cartel Policy Team, KFTC
OECD Regional Workshop
Jun. 27-29. Jeju island, Korea
Contents
1. Introduction
2. Case Overview
3. Investigation Process
4. Special Features & Implications
Introduction
Cartel regulation environment in Korea
 Major Industries are
oligopolistic
 Many business associations
 Traditional Confucian
Paternalism
 Economic and social
environment is cartel –
friendly.
 Eradicating Cartels a top priority
Introduction
Surcharges on cartels
C arte l
C as e
~1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Total
Rati o
11
13
6
19
15
12
7
14
9
12
21
27
166
15%
Amou nt
4,447
14,513
1,092
31,991
36,158
198,812
23,617
53,109
109,838
28,758
249,326
110,548
862,209
62%
Total
C as e
154
22
9
65
79
45
81
82
31
89
264
146
1,067
100%
Amou nt
14,302
16,275
1,190
136,154
141,704
225,465
160,510
82,798
149,619
35,413
258,922
155,944
1,378,296
100%
Introduction
Detailed types of cartel cases
Price
fixing
Terms of
Transaction
Production
restriction
Market
Allocation
Restriction of Establishment of
specification
joint company
Others
Total
~1995
100
8
7
14
1
3
7
140
1996
27
1
0
3
0
2
3
36
1997
14
1
1
3
0
1
2
22
1998
33
0
0
2
0
0
2
37
1999
29
0
0
0
0
0
5
34
2000
37
3
2
2
0
3
0
47
2001
31
3
0
4
0
2
2
42
2002
31
2
1
5
1
5
2
47
2003
16
2
1
1
0
0
3
23
2004
28
1
1
1
1
1
2
35
2005
38
0
0
5
0
2
1
46
2006
37
0
2
2
1
2
2
46
Total
421
21
15
42
4
21
31
555
Ratio
75.9%
3.8%
2.7%
7.6%
0.7%
3.8%
5.6%
100.0%
Case Overview
Korea’s flour market
 Milling Industry : An industry that processes wheat and
manufactures it into flour
 Market Size : Annually 820 billion KRW(887 million USD)
 8 Flour Mills (7 in truth)
 Market Share of Big 4 : 75%
 Market Share of Minor 4 : 25%
 Cooperation among companies in importing wheat
(by using the same shipping vessel)
Case Overview
Acts of violations
 Market Allocation (Jan. 2000~ Dec. 2005)
 2000~2001 Adjustment of sales volume and sales proportion
among 7 companies
2002~2006 Adjustment of output and production proportion
among 8 companies
Establishment of annual/monthly plans and confirmation of
implementation at monthly sales executive/working level
meetings
 Price Fixing (Jan. 2000~ Feb. 2006)
 Continuous price increases in 5 stages & price maintenance
(Nov.2000, Feb.2001, Sep. 2002, Apr.2003, Mar. 2004)
Case Overview
Term of violations
 2 Companies : ~ Sep. 2005
 Leniency Application
 Announcement to terminate the agreement,
Adjustment to agreed price
 6 Companies : ~ Feb. 2006 (Commission Deliberation day)
 No Termination of agreement, No changes to price
Case Overview
Impact of actions of violations
 Cartel with significant competition damaging effects
 A naked cartel, with no increase in efficiency
 Market Share 99% (participated by all domestic flour mills)
 Process industry (needs huge initial investment)
 high entry barriers
 Low price elasticity in demand
 Confirm cartel activity by regular check-ups
 Price hike of 40% during period of violation
 Average price increase rate during the same period : 10%
Case Overview
Measures taken
 Corrective Measures
 Prohibition of cartels, prohibition of exchange of information,
Order of newspaper announcements
 Re-pricing order  Decrease of about 5%
 Surcharges
 Total 43.5 billion KRW (47million USD)
Leniency Applicant : Reduction of Surcharges
(1st : 75%, 2nd : 50%)
 Prosecution : 6 Companies & 5 Representatives
 Excluding Leniency Applicant & Representatives
* In Korea, KFTC must file a complaint in order to institute public action
Investigation Process
Clues
 Similar price increases during similar periods in early 2004
 Media reports of suspicious cartel activity
 Similar price increase patterns repeated for over 5 years
 Market share consistent for the past 3-4 years
Investigation Process
Dawn Raid (1)
 Aug. 2004
 Mobilization of 20 people for two days
 7 Flour mills & business organization (excluding one smallsized local company)
 Each investigation team composed of 3- 4 people
 Failed to gather sufficient evidence
 Media’s suspicions of a cartel
 Companies were well-prepared
 Unable to conduct simultaneous investigation of all participating
companies
Investigation Process
Dawn Raid (2)
 Attention to fixing of market share
 Difficult to dispose of all related materials
 Preparation for re-investigation
 Contacted former executives and employees to gather
information (core personnel)
 Allow them to become negligent by not conducting
supplementary investigation directly
 2nd Dawn Raid (Jul. 2005)
 Include local small-sized companie & agencies
Conduct simultaneous investigations
 Acquired partial evidence of a cartel
Investigation Process
Leniency Application
 Leniency Application (2 Companies) : Sep. 2005
 Testimony of the entire scheme of violation
 Submission of evidence
 Unveiled the whole scheme through voluntary report
Special Features & Implications
Powerful hardcore cartel
 Typical hardcore cartel
 Control of supply & price  Build up market dominance
 Investigation of competitors’ books to confirm the
implementation of the cartel
 Collective response against FTC investigation
 Cooperation in the process of acquiring wheat
developed into a hardcore cartel
Special Features & Implications
Market characteristics friendly to cartels
 A market with less than 5 companies, or the Top 5’s market share is over 80%
 A market with consistent market shares for over 5 years
 A market where companies with smaller market share raises prices first,
followed by companies with larger market share
 A market where goods are similar in quality and standardized
 A market with related business associations and meetings between companies
 A market with high entrance barriers due to huge initial investments
 A market where import of the good is difficult, creating little competition from
foreign companies
 A market with extraordinarily high profits
 A market where price changes among companies are consistently similar and
occurring at similar times
 A market that has a record of cartel prosecution within the past 3 years
Special Features & Implications
Importance of initial investigation & overcoming failure
 Success is determined by the first day of investigation
 Simultaneous investigation of all related companies
 Target investigation of core personnel
 Overcoming the failure of the initial investigation
 Build assumptions of an agreement through evidence of contact
between companies and economic evidence
 Conduct re-investigation after a certain period has passed
o Cases where information on the investigation leaks prior to
the initiation
o Cases where cartels continue even after the initiation of the
investigation
Thank you