Case Study : Price fixing and Market Allocation of Flour Mill Companies in Korea (2006)

1. Case Study :Price fixing and Market Allocationof Flour Mill Companies in Korea (2006) Hang-Lok, Oh E-mail : ohr@ftc.go.kr Deputy Director, Cartel Policy Team, KFTC OECD Regional Workshop Jun. 27-29. Jeju island, Korea

2. Contents 1. Introduction 2. Case Overview 3. Investigation Process 4. Special Features & Implications

3. 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

4. Introduction Surcharges on cartels

5. Introduction Detailed types of cartel cases

6. 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)

7. 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)

8. 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

9. Case Overview Impact of actions of violations • Cartel with significant competitiondamaging 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%

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

11. 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

12. Investigation Process Dawn Raid (1) • Aug. 2004 • Mobilization of 20 people for two days • 7 Flour mills & business organization (excluding one small- sized 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

13. 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

14. Investigation Process Leniency Application • Leniency Application (2 Companies) : Sep. 2005 • Testimony of the entire scheme of violation • Submission of evidence • Unveiledthe whole scheme through voluntary report

15. 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

16. 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

17. 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 • Cases where information on the investigation leaks prior to • the initiation • Cases where cartels continue even after the initiation of the • investigation

18. Thank you