KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Policy Study KOR CBDC-based New Banking System, Bank Runs, and Efficient Allocation

Digital financial innovation drives the development of the financial industry, offering new benefits to financial consumers. However, as demonstrated by the 2023 bank run involving Silicon Valley Bank, it also heightens the risk of digital bank runs. In exploring how to prevent bank runs while ensuring the efficiency of financial intermediation, this study examines a new banking system proposed in Europe, the CBDC next-level model: A central bank issues retail Central Bank Digital Currency (CBDC) to monopolize demand deposit-taking and supply these funds as pass-through funding to commercial banks. In turn, banks provide loans to private borrowers using these funds. This system removes barriers to entry in the loan market to allow for free competition among commercial banks, fintechs, and Big Tech companies, thereby introducing perfect competition. Rigorous theoretical analysis in this study shows that this novel system could eliminate bank runs while achieving socially optimal levels of financial intermediation. Nonetheless, this model also presents some limitations, such as the centralization of personal information by the central bank and the potential political influence over lending decisions.

Summary

Research Monograph KOR Competition Policy in the Digital Platform Economy

Digital platforms have boosted consumer welfare and driven innovation and competition by integrating diverse technological advancements. These online platforms facilitate easier business transactions, instant information and content sharing, and the introduction of new products and services. However, as economic agents increasingly depend on them, concerns are growing about the excessive concentration of economic power in a limited number of platforms. As a result, in the past few years, competition policy related to digital platforms has gained more attention, prompting vigorous discussions for improvement.

Globally, competition authorities have conducted numerous investigations, and there have been several lawsuits regarding the abuse of market power by digital platforms, along with active merger reviews. In addition, major jurisdictions, including Germany, the EU, and the US, have taken legislative actions to bolster regulations over their market dominance outside the purview of current competition or antitrust law. This policy shift stems from recognizing the limitations of existing competition policies, as enforcing such laws against the anti-competitive behaviors of digital platforms becomes increasingly challenging, and there is criticism about the asynchronicity in ex-post regulatory approaches.

Against this backdrop, this report puts forth directions for competition policy reform to effectively address anti-competitive behavior by digital platform firms. The focus is on the abuse of market power and mergers that contributed to acquiring and strengthening their dominance. This report consists of four chapters as follows. The first two chapters deal with the unilateral conduct of digital platforms. Chapter 1 analyzes self-preferencing practices resulting from their dual roles, drawing out appropriate regulatory improvement measures based on their categorization, a review of their economic effects, and empirical analysis results. Chapter 2 examines the issue of platform fees, which has become a significant social concern. While exploring desirable approaches, this chapter assesses whether this issue can be viewed from the perspective of price abuse whenhigh platform fees areproblematic by reviewing price abuse cases.

The next two chapters include studies on platform mergers, focusing on vertical and conglomerate mergers, which are receiving increasing attention as they are actively used to form platform ecosystems and diversify businesses. Chapter 3 analyzes how to consider the potential for self-preferencing by platforms in the merger review process. Self-preferencing is possible only when a platform has a dual role, securing its own or affiliated firms that compete with its business users, and non-horizontal mergers are a primary means of acquiring this dual position. Based on literature reviews and theoretical analysis, this chapter identifies considerations for non-horizontal merger reviews related to self-preferencing. Lastly, Chapter 4 investigates the formation and reinforcement of entry barriers due to platform mergers. Through theoretical analysis and reviews of past cases, this chapter provides recommendations for effectively evaluating entry barrier issues in merger reviews.

The collective conclusions can be summarized in two points. Firstly, competition policy reform should fully reflect the unique characteristics of digital platforms. The analysis of their typical unilateral conduct and mergers indicates that their economic effects and pathways are not fundamentally different from those of traditional companies. However, the distinct features of digital platforms can lead to new or multiple forms of anti-competitive behavior, make certain actions more pronounced or severe, and heighten the complexity and technical challenges in analyzing and judging their anti-competitive effects.

Secondly, caution is needed when introducing or strengthening antitrust regulations that extend beyond existing legal frameworks. This report emphasizes the importance of better market monitoring and industry-led discussions on active regulatory intervention on platform fees. For self-preferencing and platform mergers, it highlights the value of case-by-case reviews with assessment criteria for effectiveness. Without sufficient consideration for the dynamism of the digital market, where rapid technological change and innovation lead to emerging business models and blurred market boundaries, regulations mayend up hindering innovation incentives, ultimately hurting competition in the long run. Digital platform competition policy should achieve a delicate balance between reducing the harms of monopolies and protecting the incentives for innovation and healthy competition. At present, a flexible response approach to competition law is deemed necessary, tailored to the specific context of each case, while enhancing enforcement through improved timeliness and effectiveness.

Summary

KDI FOCUS Competition Policy for Online Platforms’ Self-Preferencing Conducts

Self-preferencing by online platforms encompasses a spectrum of conduct types, all with implications for both anti-competitive and pro-competitive effects. Therefore, it is desirable to maintain the current ex-post regulatory framework, which applies the rule of reason and intervenes only when such practices are deemed to be unjust or harmful to fair competition, rather than imposing a blanket ban. However, the timeliness and efficiency of enforcement mechanisms should be improved in light of the distinct characteristics of the online environments and self-preferencing conducts.

- Online platforms are increasingly central to daily life, with some experiencing exponential growth to reach enormous scales.

- As concerns grow about the over-concentration of economic power in a small number of online platforms, discussions on improving competition policies related to market dominance have intensified.

- As major countries strengthen regulations on online platform monopolies, self-preferencing practices have become a key area of focus.

- This paper proposes directions for improving competition policy to effectively address self-preferencing practices by online platforms.

- Self-preferencing refers to the conduct of a platform favoring its own or affiliated products and services over those of competitors, arising from the platform’s dual role.

- Self-preferencing encompasses heterogeneous conduct types, so it needs to be categorized and specified for proper discipline.

- In this paper, self-preferencing is categorized into four types.

- First, preferential placement through undisclosed algorithms involves favoring a platform’s own products in search rankings or other prominent positioning.

- Second, identifiable preferential placement involves platforms pre-installing or setting their own software as default.

- Third, discriminatory access to data occurs when a platform exclusively uses non-public data to develop its own products.

- Fourth, discriminatory access to other inputs and markets arises when a platform grants preferential access to inputs and market for its own products.

- The primary impact of self-preferencing conduct on competing business users varies depending on the type, potentially reducing business opportunities, weakening innovation incentives, or lowering quality.

- As a result, price, quality, and innovation competition in adjacent markets may be stifled.

- Preferential placement also has the characteristics of exploitative abuse.

- Conversely, self-preferencing can also have positive effects, such as lowering product prices, maintaining or improving quality, reducing consumer search costs, increasing product diversity, and promoting competition and innovation.

- Self-preferencing can have both anti-competitive and pro-competitive effects, and the overall impact cannot be definitively determined.

- Self-preferencing by online platforms should be regulated appropriately.

- As overregulation may result in even greater unintended side effects, it would be desirable to apply the rule of reason to self-preferencing, regulating it only when deemed unjust.

- While the current ex-post approach for competition law enforcement does not require material changes, it is necessary to enhance its timeliness and efficiency.

- Undue strictness should be avoided in market definition and assessments of market dominance.

- For the implementation of ex-ante designation, it would be advisable to limit its scope to certain conduct types where efficiency effects are limited and enforcement is difficult.

- Explicitly banning selfpreferencing requires a clear description of the specific conducts involved.

- To mitigate enforcement challenges, it is worth considering granting competition authorities timely access to platform algorithms and data or imposing obligations on platforms to retain relevant information.

- If the burden of proof is to be shifted to businesses to ease the load on competition authorities,

- it should be limited to certain types.

- A commitment decision can be an effective tool to complement the enforcement of competition law.

Summary

KDI FOCUS Restructuring Platform Merger Review

Platform mergers differ significantly from traditional mergers. In platform mergers, foreclosure issues, which are crucial in traditional vertical mergers, carry less significance but may still arise indirectly. Platforms, moreover, can favor their own businesses potentially disadvantaging competitors, and leverage their market power to new businesses. Lastly, entry barriers could increase as a result of platforms’ multi-service provisions. Nevertheless, platforms can enhance consumer welfare, especially through product (service) bundling. Thus, we need to overhaul the merger review system to incorporate the aforementioned characteristics of platform mergers.

- Amidst the escalating debate on platform regulation, there has been a surge in platform mergers, leading to a corresponding increase in the need for platform merger reviews.

- There is a need for new guidelines for platform merger review to reflect the unique characteristics of such mergers. These guidelines should outline the review methodology and the assessment of potential competitive constraints.

- Indirect network externality plays a crucial role in locking in users to specific platforms.

- Platform firms provide a diverse range of services, offering multiple ancillary service platforms that revolve around a few core platforms or other businesses associated with the platforms.

- Platform firms often pursue mergers to expand into new revenue-creating areas or to strengthen their competitiveness in core services.

- One significant concern regarding anticompetitive practices in platform mergers is the potential for excluding competitors via selfpreferencing in the new markets.

- The addition of new ancillary services through a merger can potentially raise entry barriers in both the platform’s core service areas and the overall platform ecosystem.

- If a vertical merger leads to the foreclosure of purchasing or sales channels, it can seriously harm market competition.

- In mixed mergers, leveraging market power from one market to another can occur through tying.

- The determination of whether a merger is vertical or mixed is bound to be confusing when a platform, acting as an intermediary between consumers and small and medium-sized vendors, seeks to merge in order to add an auxiliary service for these vendors.

- Platform operators have the ability to foreclose competitors in other sectors but only indirectly, using accessibility to users.

- Without tying, platform operators can leverage market power from their core business area to ancillary service areas by raising rival’s costs.

- Platform mergers can raise barriers to entry not only in new markets but also in existing core service areas and the overall platform ecosystem. In some cases, the creation and reinforcement of entry barriers may be a deliberate objective of the merging parties.

Summary

Research Monograph KOR An Economic Analysis of Platform Labor: Focusing on Monopsony Power and Social Protection

We study platform labor from the perspective of labor monopsony. We start from exploring the size and trend of the domestic platform labor market and the current status of social protection available to platform workers. Extending the often-discussed nature of platform work, we shift our attention to the defining characteristics of digital platforms and the link between product and labor market competitions, focusing on labor supply elasticity with respect to wage and monopsony power. We conduct empirical studies in two distinct areas: the IT freelance market and the food delivery app market. In the context of the IT freelance market, we estimate the elasticity of labor supply by analyzing data collected from a Korean IT freelance platform via web-scrapping. The findings show that the monopsony power of the freelance platform is relatively minimal, suggesting a positive effect of the platform in fostering thicker markets. In contrast, for the food delivery app market which expanded rapidly during the COVID-19 period, a survey of riders unveils certain limitations related to multi-homing and platform switching, thereby signifying a potential for monopsony power in this sector. Extended analyses using app-use data combined with large-scale labor surveys show a downward wage trend with an increase in market concentration―despite stable or even growing employment levels. This pattern contradicts the traditional expectations under labor monopsony, which usually involves negative impacts on both employment and wages. Instead, our findings suggest an asymmetry in bargaining power. We conclude with overarching implications on competition and labor policies, focusing on platform’s monopsony power.

Summary

KDI Policy Forum The SME-Suitable Industry Reservation Policy: Economic Effects and Policy Direction

■ After marking the ten-year milestone since the adoption of the SME-suitable industry reservation policy, this study investigates whether the policy has enhanced the competitiveness of SMEs by safeguarding them as intended and offers implications for its future implementation.

- This SME policy involves the selection of specific products to protect the business territories of SMEs and limit the entry or expansion of large enterprises; however, evidence-based discussions on its effectiveness have been limited.

- While the production and employment of large businesses decreased after the adoption, the business activities of SMEs did not change much.

■ This reservation policy aimed to "ensure the competitiveness of SMEs through their protection." It successfully fulfilled its protective role by reducing the likelihood of SMEs exiting the market. However, the reservation policy had limited impact in terms of improving their performance or competitiveness.

- Following the designation of a set of industries (products) reserved for SMEs, the probability of exit for SMEs engaged in the production of those specific products significantly decreased. However, these SMEs did not show significant differences compared to other product producers in terms of most performance and input indicators.

- The industry-level analysis shows that the policy contributed little to the performance of overall industries to which the designated products belong.

■ The disappointing outcomes of the policy’s stringent measures highlight its limited effectiveness, as the restrictions on the expansion or entry of large enterprises did not lead to significant improvements in the performance of SMEs.

■ Based on the findings, it is recommended to suspend new applications for the designation of SME-suitable industries and gradually phase out the already designated reserved industries.

- In any business field, when there is greater uncertainty about future market restrictions, firms are less incentivized to engage in that market and invest in domestic production facilities.

- A policy that restricts production activity in a specific business area solely based on firm size may inadvertently undermine the efficiency of resource allocation in the broader economy.

■ Instead of protecting specific business areas, a win-win policy between SMEs and large firms should prioritize providing effective support for the growth of capable SMEs through appropriate regulatory measures to address anti-competitive and unfair practices.

Summary

Research Monograph KOR Designing the Criteria on the SME Support Policy: Focusing on the Definition of SME and Small-Scale Reservation Policy

Government support programs for small and medium enterprises (SMEs) and regulations for large firms are all size-dependent policies. The purpose of this study is to evaluate the effectiveness of the SME definition and the small-scale reservation policy on SMEs' performance. This study intends to provide policy implications when designing the criteria for the SME support policy.

Chapter 1 introduces the criteria for defining SMEs and presents the distribution of firms according to the SME size categories. In Korea, SMEs account for over 99% of the total number of business enterprises, meaning that the definition of SMEs is broad enough to include most firms. There are numerous policy programs and tax benefits for SMEs in Korea and this chapter lists those support policies according to various size categories.

Considering all SME policies are size-dependent, Chapter 2 examines the effect of size-dependent policies overall, not of individual and specific policy, by analyzing changes in firm performances and employment with a change in the criteria used to categorize SMEs. We exploit the changes in the SME status of each individual firm by the change in the criteria to measure the effects. The result shows that the criteria change from the employment size categories into the turnover size categories has little impact on achieving the intended growth in employment. However, newly designated SMEs show significantly increased sales. This finding can be interpreted as indirect evidence of positive effects from tax benefits and support programs targeting SMEs, but further research is needed to find direct evidence. We also found that there is a significant decrease in sales per employee for the firms whose SME status is withdrawn, suggesting that there exists an incentive to maintain the status.

Chapter 3 demonstrates the economic effects of reservation policy for SMEs. Among an array of size-dependent policies, the reservation policy is one of the most restrictive policies since it directly regulates the entry and production activities of large enterprises for specific goods. The analysis demonstrates that although reserving certain markets may temporarily safeguard the SMEs producing the products, this effect is temporal and not beneficial to the industry's overall growth. The reservation policy may be of little use in securing the competitiveness of SMEs and can potentially exacerbate the misallocation of the resources among the enterprises within the economy. This study also points out that even in the markets not reserved for SMEs, investment incentives may shrink on the uncertainty that their production activities could be restricted at any time.

The findings of this study are consistent with recent studies arguing that the diverse distribution of firm characteristics such as productivity and size should be considered when designing SME policies. The overall productivity of an economy can increase when resource allocation shifts from low-productive firms to high-productive ones. In turn, it shows the need to check whether a policy operates against efficient resource allocation when examining the impact of a specific policy on the economy as a whole. Furthermore, this study is relevant to the field of measuring the effectiveness of SME policy by providing empirical analysis at enterprise or establishment levels.

Summary

Research Monograph KOR An Economic Analysis of Mobility Service: Modeled from Taxi Demand

The mobility market is rapidly evolving in line with digital transformation. This study suggests the mobility industry's future trajectory based on the Korean taxi business. To understand the mobility market comprehensively, we use supply and waiting time data to estimate taxi demand and combine it with customer survey data. Due to the high frequency of supply and waiting time data, we can estimate taxi demand in detail by 10-minute and village units in Seoul and Gyeonggi-do. As a result, the peak demand for cabs came more after work in the evenings than during working hours. Furthermore, the demand estimation demonstrates that there is always extra demand in a Gyeonggi-do suburb, although severe excess demand occurs in Seoul at night. The result shows that finding a policy to address the imbalance is difficult because the imbalance for taxis varies significantly depending on the features of the location (commercial area, residential area, etc.) and time.

In addition to the market analysis, we surveyed customer preferences for new mobility. According to the survey results, there is a massive demand for ride-hailing services and efficient platform taxi services. And there is a relatively large willingness to pay for additional payments during peak times. We also examine the effect of new mobility services, such as an efficient platform service, to reduce waiting time and ride-sharing service. Even if the price increases, the overall market demand increases when two services are available. The emergence of ride-hailing services has helped to reduce excess demand dramatically.

Finally, when various mobility services are introduced to consumers, we can expect the whole mobility market to improve as relaxing excess demand and raising supplier income. Therefore, it is required to further revitalize the platform transportation business (Type 1), which may lead these services, as well as to lower the transportation sector's entrance barrier. On the other side, to prevent unfair trade practices in the mobility platform, a plan to encourage competition must be developed, allowing diverse company operators to enter and compete.

Summary

Policy Study KOR A Study on the Change of Sales Concentration Linked to Platforms Providing On-demand Services

This study analyzes the impact of food delivery service platforms on the restaurant market in South Korea. The appearance of a delivery app leads to many changes in the food service industry. Using monthly sales panel data of restaurants nationwide in 2020 provided by a credit card company, this study examines the revenue growth of restaurants which use a delivery platform. It also relates to sales redistribution among restaurants that use a delivery platform.

The study finds that restaurants which use a food delivery service platform have higher sales than those which do not. During the COVID-19 pandemic in 2020, sales through delivery apps played a role in compensating for the sharp decline of in-person dining at many restaurants. In particular, restaurants with low sales are more likely to raise their position in the market with a food delivery platform. It implies that small restaurant owners should be more actively encouraged to use a delivery platform.

Second, it also shows that sales changes occurred when a restaurant started or stopped using a delivery service platform. Each restaurant can expect a 33.0% sales growth due to the use of delivery apps. In addition, it turns out that restaurants with lower sales have higher expectations of sales growth with a food delivery platform than those with higher sales.

Finally, this study shows sales inequality of entire markets could worsen due to food delivery service platforms. As a result of the Gini index, a food delivery sales component has a more significant contribution to worsening inequality as compared to dine-in sales.

Based on the above empirical analysis, this report can suggest several implications for the growth and distribution of the delivery platform market. Food delivery platforms increase consumers’ convenience and benefit owners of both small and large restaurants. Therefore it is essential to set a policy direction that does not hinder this effect. However, as all restaurants begin to use delivery apps, the larger restaurants are able to increase their market share more than smaller restaurants. It suggests that new policies address ways to maintain a competitive market.

Summary

Policy Study KOR Considering Innovation Competition in Merger Controls

First, this study briefly discusses arguments that it has a limitation to apply results from the extensive literature on the impact of competition on innovation incentives in a horizontal merger context and recent studies that examine more directly the effects of merger on innovation incentives.

Next, taking into account that the recent studies mostly focus on the effects of merger on intensive margin of innovation incentives, this study analyzes the effects of merger on extensive margin of innovation incentives and on R&D project choice. It is shown that (i) a horizontal merger induces merging firms to choose less differentiated R&D projects compared to a situation in which those firms choose their R&D projects independently without the merger if the probability of achieving a successful innovation is relatively high and more differentiated R&D projects in the opposite case; (ii) A horizontal merger can increase the number of R&D projects pursued by merging firms if the probability of achieving a successful innovation is relatively low and R&D cost is relatively high but decrease it if the probability of achieving a successful innovation is relatively high and R&D cost is relatively low. (iii) The impact of the horizontal merger on innovation competition is not clear, and consequently, consumer and social welfare may increase by the merger when the merger intensifies innovation competition.

Finally, this study examines relevant regulations and merger control cases to provide policy implications.

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