KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Policy Study KOR A Study on Information Provision and Consumer Protection in Online Platforms

This study investigates how suppliers respond to consumers exhibiting behavioral biases due to drip pricing, specifically whether suppliers will take advantage of this situation. Previous research indicates that when exposed to drip pricing, consumers can react in two opposing ways: (i) becoming less sensitive to later-revealed additional charges due to behavioral biases, potentially increasing demand; (ii) perceiving such practices as deceptive, potentially decreasing their intention to repurchase and damaging the reputation of the supplier and product. Consequently, suppliers face conflicting incentives when determining base and additional charges: the pursuit of immediate profit, achieved by using consumer behavioral biases, against enhancing their long-term reputation through price transparency. In light of this, it aims to empirically analyze which of these incentives prevails in the real market.

Focusing on Airbnb, a representative accommodation-sharing platform, where mandatory cleaning fees are not disclosed until later in the transaction process, this research utilizes new panel data to examine the evolving pricing strategies of suppliers. An analysis of major cities where Airbnb is actively operational reveals a steady relative increase in cleaning fees compared to room rates, which are base prices, from the second half of 2015 to the end of 2018. Furthermore, in analyzing the relationship between cleaning fees and host experience in New York City, controlling for accommodation and host characteristics, transaction conditions, and market situations, the study finds that more experienced hosts tend to charge separate cleaning fees and set hidden cleaning fees higher relative to base prices.

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 Do Online Platforms Reduce Information Asymmetry?

This study examines the information asymmetry of the platform economy in the context of the sharing economy. In particular, the focus was placed on Airbnb's superhost policy, and the effects of the platform's reputation badge (quality certification) on transaction volume and moral hazards were analyzed and the effectiveness of various trust-building market-mechanisms was compared. By combining the database of Inside Airbnb and AirDNA, an analysis was conducted of the data on New York City from August 2016 to December 2018 (from Airbnb webpage). Superhost badges have been shown to have a positive impact on performance―providing incentives for hosts to maintain and improve service quality. However, incentive for reputation milking was also found. Indeed, when selected as a superhost, the number of listings increased while service quality and guest satisfaction gradually decreased. This shows the imperfections and limitations of market mechanisms. However, since the moral hazard is not severe, it can be inferred that self-regulation is still effective under a proper design. Besides, the effects of signaling devices were found to differ depending on whether the guest or the host bears the burden of authentication. The results suggest that it is necessary to discuss the optimal design for a trust building mechanism before discussing government intervention in the matter of information asymmetry.

Summary

Policy Study KOR A Study of Competition Issues in the Platform Market: Focusing on Search Ranking

Focusing on search rankings, this study analyzes the possibility that online platform signaling mechanisms can be commercialized and used to distort market competition. It first explores Europe’s institutional changes with respect to the provision of search results and information by online platforms. The European Commission introduced new rules on P2B trading practices, and is also pushing for amendments to consumer laws. The regulations ensure that platform users are clearly informed about the main parameters determining ranking and whether the ranking has been directly/indirectly affected by any payments made by the business operator.

Furthermore, this study collected and empirically analyzed panel data on search rankings and hotel star ratings, significant matching mechanisms of the hotel reservation platform. It was found that the ratings given by the platform themselves are often much higher than those given officially, meaning that the star ratings may be used as a marketing tool rather than having informative value reliable signal of quality. Another statistical analysis of the relationship between search ranking, hotel rating and promotional tags reveals a weak possibility that hotels with higher platform rating than official rating are more likely to rank higher in search results. Given its influence on users, the transparency and fairness of platforms’ matching mechanism should be enhanced. That is, online platforms are responsible for providing users with clear to distinguish between objective information and advertisement or paid information in determining ratings and information tags as well as search rankings.

Summary

Policy Study KOR Collecting and Using Consumer Data and Social Welfare: Focusing on Personalized Pricing

As it becomes easier for firms to collect and use consumer data, concerns are growing over the possible wider application of personalized pricing. This study first analyzes the welfare effects of personalized pricing, and then proposes policy directions that can help in addressing the potential issues.

In a monopoly market, personalized pricing maximizes social welfare but drastically diminishes consumer surplus compared to uniform pricing. However, this can be mitigated with a deterioration in the precision of personalized pricing or if consumers can and are willing to anonymize their identities. When firms compete, the welfare effects of personalized pricing varies with the nature of competition. It is possible that consumer surplus increases with personalized pricing when there is best-response asymmetry. It is also found that under personalized pricing, entry is less likely while predatory pricing is more likely.

Given that the welfare effects of personalized pricing depend heavily on the competitive aspects of a market and that the data protection law is not only for dealing with personalized pricing, a competition law should be primarily applied to determine whether certain personalized pricing acts are abusive. In particular, personalized pricing in a market with limited competition or that which is intended to lessen competition needs to be more closely monitored. This study also presents suggestions on designing and enforcing both the competition and data protection laws in a complementary manner so that they can effectively deal with personalized pricing.

Summary

Research Monograph KOR An Economic Analysis of Consumer Behavioral Biases and Its Policy Implications: Focusing on Drip Pricing

Among the practices pertaining to the exploitation of consumers’ behavioral bias in product pricing and information disclosure, this study analyzes drip pricing; considered to be the most damaging to consumers. The negative effects have been confirmed in several preceding literature and analyses which show that drip pricing can impel consumers to not only to search and compare less but also to respond numbly to additional charges, subsequently inducing an increased demand for the product. Empirical analysis of Airbnb data reaffirms the existence of consumers’ behavioral bias and also indicates that suppliers may have stronger incentive to take advantage of such bias as they attain more knowledge of it. Specifically, analysis of the drip-pricing practices of Airbnbs, in which obligatory extra fees for cleaning and additional guests are presented after the accommodation fees, revealed that the occupancy rate responds more numbly to the extra fees than to the accommodation fee and that hosts with more experience and know-how have a tendency to apply separate and higher cleaning fees. Moreover, an international comparison of the regulations for and enforcement of price disclosure showed that although all countries have explicit bans on drip pricing in the aviation industry, there are no specific rules for other industries, except for Australia, and instead, regulatory provisions are enforced on certain actions, which could mislead consumers. To that end, like major countries, Korea should make further efforts to establish and enforce regulations to clarify when and how the service provider discloses the total price where all obligatory fees are included.

Summary

Research Monograph KOR The Market Mechanisms of the Platform Economy and Government Policies

The fast-growing platform economy has raised various economic and policy questions. This study focuses on two issues that have attracted a lot of attention recently―online reputation system and data concentration. A unique dataset is collected on hotel reviews from 4 major online travel agencies (Agoda, Booking.com, Expedia, Hotels.com) and TripAdvisor through web crawling. The empirical results cast doubt on the effectiveness of online reputation systems that reduce information asymmetry and build trust among users in the platform economy. Further, it is shown that the incentive for platforms to correct for information asymmetry may not be sufficient. We then reviewed recent discussions about the potential economic harms of data concentration. Platforms may acquire and abuse market dominance based on big data. The possibility that collusion is formed/facilitated through algorithm utilizing big data triggers a discussion of whether the current cartel policy is still valid. Finally, privacy infringement is critical to all of these data concentration issues.

Summary

Policy Study KOR Study on the Economic Effect of Enhanced Fixed Book Pricing Scheme

This paper studies the economic effect of the enhancement policy for the fixed book pricing scheme in November, 2014. The enhancement, which prohibits the price discount of more than 10% for every selling books, aims to increase profits of small and mid-size local bookstores, by cutting the online bookstore’s price competitiveness.

Using manually collected data before and after the enhancement policy, the paper examines the change of selling prices, sales amount of books. Moreover, this work also calculates welfare loss of consumers, deadweight loss, and especially transferred amount from online bookstores to offline bookstores.

Due to the enhancement, the selling price rises by 16.2% for bestseller books and by over 40% for steady-seller books. The enhancement decreases the sales amount by 12.1%. The size of welfare loss of consumers is over than 13 billion (won) per month, and the amount of deadweight loss is over than 8 billion per month. The transferring effect happens only when the demand is highly inelastic, but even in this case the size is not any considerable.

These disappointing results come from a careless direct market intervention by price regulation, which is not designed for delicately specifying policy beneficiaries such as small and mid-size bookstores. To promote their businesses, we need a well-designed direct subsidy policy.

Summary

Research Monograph KOR Analysis on the Conflict of Interests between Financial Products Recommendation Service of Sales Channel and Retail Clients

This study finds ways to resolve conflict of interests between financial products recommendation service of sales channel and retail clients in Korea. To that end, this study conducts an empirical analysis on mutual fund recommendation and fee, an on-line survey on the experience of mis-selling, and an survey of foreign cases on legal system of financial advisory.

After the global financial crisis, there is an increasing concern on consumers' financial loss from mis-selling and the asymmetric information and the complexity of financial products. Therefore, major countries, such as the UK and Australia, have made efforts to mitigate structural conflict of interests by reorganizing the legal system and regulation on the financial advisory service.

In Korean financial products market, number of complaints and disputes on mis-selling are consistently growing. Therefore, appropriate policies to mitigate the mis-selling are urgently required. In major countries with organized financial regulation and law, personal recommendation of a specific financial product is recognized as 'financial advice'. On the contrary, personal recommendation is regarded as a sales process in Korea, as 'financial advice' is not established as a legal concept for retail clients. Even though the financial authorities are considering an implementation of conflicts-free independent financial advisor, the recommendation service from current sales channel is not included as 'financial advice'.

This study confirms that sales channels' inclination to recommend relatively higher-commission products through mutual funds data, as well as Korean consumers’ perception and actual experience of conflict of interest through an online survey. It also suggests measures to promote the independent financial advice and upgrade the financial advice service by introducing recent regulatory reforms and laws on financial advice service in major countries.

Chapter 3 demonstrates that financial institutions tend to select mutual funds with higher sales fee in the recommendation lists on their web-pages. Even with regression analysis controlling other factors, fund sales fee and commission have statistically significant impact on the recommendation.

Chapter 4 carries out an online survey targeting 1,600 consumers who have ever bought insurances for investment or mutual funds within last 5 years. The result shows a considerable number of respondents experienced that sellers provided an insufficient explanation about the probability of principal loss, or they induced unsuitable higher-risk products. A regression result also shows that consumers with lower financial literacy are more likely to experience these mis-selling.

Consequently, below policies are required to protect financial consumers and invigorate independent financial advisors. First, a legal definition of financial advice should be established. Second, a structure of sales commission provided by current sales channel should be disclosed to consumers in detail. Third, financial authorities, even if not forced measures like in the UK, should suggest a balanced KPI (key performance indicators) to mitigate conflict of interest of financial advisors. Also, it is necessary to strengthen online sales platform for the pressure of competition.

Summary

KDI FOCUS Impact of SME-suitable Business Area Designation on the Korean Tofu Market

□ The SME-suitable industry designation scheme aims to foster the growth of Korea’s SMEs by restricting the entry or expansion of large enterprises. However, without a full understanding of specific business areas, the restrictive measures can undermine SMEs’ profit as well as consumer welfare. The scheme should be intricately implemented based on both prior investigation and ex-post analysis at product level. In the case that the prior investigation reveals little substitutability between SME-made and large enterprise-made products, it would be more prudent to not designate the business as SME-suitable. Additionally, business areas that are found to have suffered from a shrinking market and falling profits (SMES) via ex-post analysis should not be subject for renewal or extension.

- More than three years have passed since the designation scheme was initiated, but disputes over its efficacy are still ongoing.

- This study analyzes the economic effect of the designation scheme with the focus on the Korean tofu market, which is currently under intense debate over its suitability as a SME business area.

- Once designated as ‘SME-suitable,’ the business area is not accessible to large enterprises and their expansion is restricted for the initial three years.

- The point of the recent disputes was on the redesignation of soon-to-be expired industries. There were heated arguments about the pros and cons among large, medium- and small-sized companies.

- Analysis of the economic effects of the scheme must be conducted separately for each industry, reflecting the features of the companies and characteristics their products.

- The tofu manufacturing business has grown consistently until recently, but posted slowing growth in 2012 and negative growth in 2013.

- The declining rate of growth in the tofu market is caused by the slowing growth rate of the packed tofu market, due to the decreased sales of large enterprises affected by the designation scheme.

- Responding to the designation scheme, large enterprises reduced the production of domestic soybean tofu and expanded that of imported soybean tofu.

- Compared to imported soybean-based products, domestic soybean-based products are sold at a higher price and reap in smaller total profits, meaning that limiting sales will inevitably weaken the incentive to produce.

- As large enterprises expanded their production of imported soybean-based products, the market witnessed heightened competition and stagnated sales of SMEs.

- Since the scheme was adopted, consumer welfare has suffered a loss of approximately 2.4 billion won (5.5%) on a monthly average basis, or 28.7 billion won on an annual basis.

- Large enterprises are estimated to have experienced a loss of 19.5% in profit in 2014, compared to 2011. The drop is particularly steep in domestic soybean products.

- The designation scheme needs to be managed in a highly selectively, considering the characteristics of each industry.

- Ironically, the scheme developed with an intent to encourage the growth of SMEs has undermined the profitability of not only large enterprises but also SMEs.

- The designation scheme should be implemented with more finesse based on thorough prior market investigation and ex-post analysis at the product level and on product characterisitcs.

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