Superior Bargaining power: Dealing with Aggregate Concentration Concerns

Thomas K. Cheng and Michal S. Gal1

Introduction

In most jurisdictions the use of superior bargaining power, by itself, is not recognized as a competition law offense. Instead, its outcomes are prohibited if they fall within the recognized categories of anti-competitive exclusionary conduct (e.g. tying, exclusionary contracts) and in some jurisdictions of exploitative conduct (e.g. high unfair prices). Yet some jurisdictions, such as Japan and South Korea, prohibit not only the outcome but also the abuse of superior bargaining power itself, thereby casting a wider competition law net. One of the least recognized justifications for this prohibition, yet one that is rooted in the economic histories of both jurisdictions, is limiting the effects of high levels of aggregate concentration, which go beyond traditional market power concerns. Accordingly, this paper focuses on whether the prohibition can and indeed serves as an efficient tool to deal with at least some of the effects of aggregate concentration.

We first ask when does superior bargaining power harm competition and welfare. Recognizing such instances is essential in order to ensure that the legal prohibitions achieve their purpose. Indeed, some scholars argue that superior bargaining position, resulting from a fair game in the market and based on relative efficiencies, not only does not harm competition and welfare in the long run, but rather furthers them. This is because it creates incentives for dynamic and productive efficiency: the superior bargaining power is part of the threat at the end of the market competition stick. Furthermore, if the monopolist is located in the downstream market, he may use his superior bargaining position in order to extract lower prices from his suppliers that might, in turn, reduce his own profit-maximizing price. At the same time, the economic literature recognizes some market conditions under which the use of superior bargaining position does not increase competition or welfare. The first part of the study surveys the economic studies that support both views.

The second part focuses on a particular scenario which the prohibition against the abuse of superior bargaining position may address: bargaining power resulting from high levels of aggregate concentration. Aggregate concentration occurs when a small number of market players control a large part of the economy (hereinafter: "conglomerates"). High levels of aggregate concentration are common in small economies, yet large jurisdictions sometimes also suffer from similar problems. Some known examples include the Chaebols (meaning "wealthy families") in Korea, the Keiretsu in Japan and the Business Houses in India.

1 Associate Professor, University of Hong Kong and Professor and Director of the Forum for Law and Markets, University of Haifa, respectively. The authors wish to thank Neil Ben-Ishai for his excellent research assistance, the Israeli Science Foundation (ISF) for financial support of the research, and the UN Committee on Trade and Development (UNCTAD) for empirical support.

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Large conglomerates can significantly impact competition and welfare. They can strengthen competitive pressures. Their substantial resources and varied experience, as well as their economies of scale and scope, often enable them to enter markets more readily than other firms, especially when entry barriers are high. Moreover, their vast financial means and diversified holdings portfolios enable their business units to tap into a large pool of retained earnings, thereby enabling them to take more risk in product development or in entry into new markets. Where governments and market institutions do not function well, conglomerates may allow firms to overcome such obstacles.

At the same time, conglomerates raise significant competitive concerns. Where several large conglomerates operate, this may increase the instance of oligopolistic coordination in and across markets. Given their current and potential multi-market contact, conglomerates are often likely to create a reciprocal status-quo, thereby not entering each other's markets or not engaging in aggressive competition in markets in which they potentially compete. Conglomerates might also create strong deterrence for the entry or expansion of competitors which are not related to another conglomerate into their markets. These effects, in turn, might lead to stagnation and poor utilization of resources, which negatively affect growth and welfare. Another major concern is a political economy one: given their size and economic impact, large conglomerates may attempt to translate their economic power into political power in order to create, protect and entrench their privileged positions, thereby enjoying benefits such as government protection from the perils of competition. Accordingly, even if a firm does not possess significant market power in a particular market (what competition law usually centers upon), it might still be able to exercise significant bargaining power if it controls large parts of the economic activity in a jurisdiction.

Most countries simply disregard or give no weight to pure concerns of superior bargaining power resulting from conglomerates or focus mainly on portfolio (or range) effects, when a conglomerate merger involves complementary products. Some jurisdictions, such as New Zealand, even specifically state that the focus of their competition law is only on competition in "a market." At the same time, some jurisdictions deal with such concerns, inter alia through a prohibition against abuse of superior bargaining position, to protect smaller firms from exploitation by firm with significant economic power, even if they do not enjoy market power in the traditional competition law use of this term in the relevant market. South Korea and Japan have adopted such provisions to attempt to counteract the inherent advantage in bargaining power enjoyed by large conglomerates vis-à-vis smaller or weaker trading counterparts.

Accordingly, the third part of the chapter analyzes the use and the suitability of competition laws for regulating superior bargaining position resulting from high levels of aggregate concentration. The question arises, inter alia, because the competitive issues usually flow from the structure of the market or from conduct which is generally regarded as lawful (most importantly, oligopolistic coordination

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across several markets). Thus, intervention would often resemble direct regulation which proactively and directly intervenes in market conditions rather than retroactively prohibits infringements regarding certain types of conduct. Such regulation by competition authorities raises interesting issues regarding the authorities' mandate and sufficiency of analytical and regulatory tools, given that such regulation can have significant effects on the economy and would affect wider parameters of welfare. Also, such intervention is likely to raise political economy issues, both from powerful market players as well as from other regulators on whose turf the Authority might step, which might in turn affect the Authority's ability to perform its regular tasks. These considerations will be tied together in order to seek to answer the question of whether the prohibition is an efficient tool to deal with competitive concerns arising from high levels aggregate concentration.

The analysis is theoretical as well as empirical. It carefully analyzes the experiences of Japan and South Korea in dealing with aggregate concentration through competition law. This experience is interesting, inter alia, because in recent years Japan has shied away from using superior bargaining power prohibitions to deal with aggregate concentration, while South Korea has taken a different stance.

Chapter II: When does Superior Bargaining Position Harm Competition and Welfare?

Does superior bargaining power harm competition and welfare? It is often argued that superior bargaining position, resulting from a fair game in the market and based on relative efficiencies, not only does not harm competition and welfare in the long run, but rather furthers them.2 This is because it creates incentives for dynamic and productive efficiency for firms vying to possess economic power: the superior bargaining power is part of the threat at the end of the market competition stick. Limiting its use chills the incentives to invest in productive and dynamic efficiency.

On its face, this claim resembles, in many respects, that used to criticize excessive pricing regulation, the difference being that one prohibits the process and the other the outcome of a superior bargaining position.3 In fact, many abuse of superior bargaining position cases can be analogized to excessive pricing, from the buyer’s point of view. Most of the abuse of superior bargaining position cases concern powerful buyers exploiting their contractual counterparts. Therefore, effectively, these powerful buyers are imposing a low contractual price on their contractual counterparts, either directly or indirectly by way of contractual conditions such as forced purchase of unwanted

2 cite.3 See, e.g., OECD, Roundtable on Excessive Pricing (2011?); Padilla and Donoghue, Abuse of Dominance...; Michal S. Gal, "Abuse of Dominance- Exploitative Practices" in Ioannis Lianos and Damien Geradin eds., Handbook on European Competition Law- Substantive Aspects (Edgar Elgar, 2013), p. 385. Yet such similarity depends on the interpretation of these prohibitions. If, for example, only one of them takes into account the way in which the market power was created- e.g., whether the firm enjoys a comparative advantage based on a superior product it invented- whereas the other only looks at the end result (market power), they might differ significantly in their application in practice.

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goods or forced provision of financial benefits.4 Therefore, criticism for regulating excessive pricing would also at least partially apply to these kinds of abuses of superior bargaining position. Yet this analogy is not complete, as in some cases the abuse of a superior bargaining position may not only create exploitative effects, but also exclusionary ones that create barriers to entry and thus harm the process of competition. Accordingly, so far as the abuse of bargaining power extends beyond mere exploitation, wider effects ensue. Furthermore, as elaborated below, a superior bargaining position that does not result from an efficiency-based comparative advantage (e.g., increased political economy effects) does not necessarily create social-welfare-increasing dynamic and productive efficiency.

To the extent that the contractual price deviates from the competitive level and causes the contractual counterparty, which is often a supplier, to reduce output because of the suboptimal price, abuses of superior bargaining position result in deadweight loss and allocative inefficiency.5 The more substantial the buyer power, the more pronounced the welfare loss..6 However, it should be observed that in many of the abuse of superior bargaining position cases, the imposition of the detriment only takes places after the agreement has been entered into. The abuse thus effectively amounts to an ex post revision of contractual terms, which, due to the bargaining position of the buyer, the counterparty finds it difficult to refuse. Therefore, in the usual cases, the supplier does not have the opportunity to reduce output. The level of output has already been agreed upon. Therefore, the allocative inefficiency discussed may not result, unless suppliers systematically have reduced output already in light of the prevalence of abuse of superior bargaining position and the expectation that the powerful buyer would force an ex post revision of contractual terms upon the supplier.

In addition to creating deadweight loss, abuse of superior bargaining position may create other kinds of inefficiencies and welfare loss. It is possible that by systematically taking advantage of the upstream suppliers, the powerful downstream buyer effectively discourages investment and innovation by the suppliers.7 By having the returns to their investment systematically reduced by the powerful downstream 4 Conceptually, the powerful buyer can achieve the same outcome by either pursuing the proscribed conduct or simply reducing the contractual price. The most obvious example is in the case of forced provision of financial benefit. Assuming that the contractual counterpart is not uniquely positioned to provide certain financial benefits, by demanding financial benefits, the powerful buyer is effectively lowering the contractual price.5 Ariel Ezrachi and Koen de Jong, ‘Buyer Power, Private Labels and the Welfare Consequences of Quality Erosion’ [2012] 33(5) European Competition Law Review 257; Ariel Ezrachi, ‘Buying Alliances and Input Price Fixing—In Search of a European Enforcement Standard’ [2012] 8 Journal of Competition Law and Economics 47.6 Yet it is important to remember that in most of the abuse of superior bargaining position cases, especially the Japanese ones, market power on the part of the buyer never featured in the analysis. In fact, in none of the recent JFTC cases did the buyer possess substantial market power, let alone monopsony power.7 Office of Fair Trading, The Competitive Effects of Buyer Power, ECON DISCUSSION PAPER 22 (2007), available at http://www.rbbecon.com/downloads/2012/12/oft863.pdf; Dobson Consulting, Buyer Power and its Impact on Competition in the Food Retail Distribution Sector in the European Union, Consultancy Paper for the European Commission 14 (1999), available at http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.204.3426&rep=rep1&type=pdf.

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buyer, the upstream suppliers may have less ability to undertake important investments. This is especially so because many abuses take place ex post after the agreement has been entered into. The supplier may not be able to predict the incidence and extent of such conduct. This might further discourage investments.

Furthermore, abuse of superior bargaining position may lead to over-investment in often inefficient activities. This is exemplified in some abuse of superior bargaining position cases, elaborated below, in which the powerful downstream buyer requires the upstream suppliers to provide their employees to help the buyer open new stores or fund promotional activities. Needless to say, when the beneficiary of a certain activity does not bear its costs, and when the beneficiary makes investment decisions, there is likely to be over-investment.8 If a powerful buyer need not take into account the costs of promotion because they are borne by suppliers which must deal with it, the buyer is likely to call for more promotion.

Finally, abuse of superior bargaining position allows the powerful buyer to expropriate the relationship-specific investment made by the upstream supplier through ex post revision of contractual terms.9 If suppliers know that ex post expropriation is likely, they will refrain from making the investment in the first place. To the extent that the supplier’s relationship-specific investments are welfare-enhancing, society is obviously worse off when such investments are not made. This deterrent effect can be alleviated by credible commitments that the buyer makes not to undertake expropriation action. In a way, the regulation of abuse of superior bargaining position can be seen as a surrogate to such a credible commitment.

In addition, at least some of the conditions imposed are also exclusionary in nature, as they affect the purchase decisions of buyers based not only on the quality of the competing goods. Here, the host of competition and welfare effects associated with the creation of artificial barriers to entry arise.

Chapter III: Superior Bargaining Position that results from Aggregate Concentration

8 This is but a variation of the classic externality argument in economics. If a beneficiary of an activity does not bear all its costs, it will tend to over-invest in the activity. A paradigmatic example would be industrial production that results in pollution in the environment. HAL R. VARIAN, INTERMEDIATE MICROECONOMICS: A MODERN APPROACH 650-55 (8th ed. 2010). The only difference is that in the case of abuse of a superior bargaining position, the defendant is able to externalize its own actual costs of production, as opposed to costs to the environment, as in the case of pollution. 9 Paul Joskow, Contract Duration and Relationship-Specific Investments: Empirical Evidence from Coal Markets 77(1) AM. ECON. REV. 168 (1987); Howard Shelanski & Peter Klein, Empirical Research in Transaction Cost Economics: A Review and Assessment, 11(2) J. OF L. ECON., & ORG. 335 (1995); Oliver Hart, An Economist’s Perspective on the Theory of the Firm, 89 COLUM. L.R. 1757 (1989); Martin Strieborny and Madina Kukenova, Investment in Relationship-Specific Assets: Does Finance Matter?, LUND SCH. OF ECON. AND MGMT. WORKING PAPERS, available at www.lusem.lu.se/media/kwc/working-papers/.../kwc-wp-2013-10.pdf

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Having surveyed the general theories which focus on whether and when superior bargaining power might harm competition and welfare, we now turn to a specific instance- when such bargaining power results from or is strengthened by high levels of aggregate concentration. The analysis is comprised of two stages. In the first we analyze the welfare effects of aggregate concentration. In the second we focus on the effects of high levels of aggregate concentration on the conglomerate's bargaining position.

III.A Aggregate Concentration Concerns10

Aggregate concentration measures the level of economic activity (or assets) in a given jurisdiction which is controlled by a small group of economic entities through holdings across firms or markets (hereinafter: "conglomerates").11 Aggregate concentration differs from market concentration in that the latter focuses on the level of concentration in a specific market, whereas the former focuses on a wider point of view, across markets. Indeed, it might be possible that conglomerates that enjoy high levels of aggregate concentration might not enjoy a large market share in many of the markets in which they operate, and therefore the tests of market power commonly used in competition law, which use market shares as a starting point, will not find that they enjoy market power. Yet often such conglomerates might still enjoy significant economic power even in such markets, given their holdings elsewhere.

Aggregate concentration is a real concern in many jurisdictions around the world. Not surprisingly, high aggregate concentration levels are common in many small economies. For example, in Israel the largest 16 conglomerates controlled almost half of the market value of all Israeli firms in 2009.12 In Hong Kong, the largest 16 conglomerates controlled firms generating 84% of the territory's GDP and in Singapore almost 50%.13 These numbers tell only part of the story, since conglomerates often also control essential markets, including financial institutions and telecommunications, as well as major media outlets, which further their economic power. Yet the phenomenon is not unique to small economies, and can be found in large and medium jurisdictions as well. Some known examples include the Chaebols in Korea, the Keiretsu in Japan and the Business Houses in India.14 While a correlation generally exists between a low level of development and high levels of

10 Based, in part, on MICHAL S. GAL, COMPETITION POLICY FOR SMALL MARKET ECONOMIES (Harvard University Press, 2003) and Michal S. Gal, "Merger Policy for Small and for Micro Economies" in The Pros and Cons of Merger Law (Sweden, 2013). 11 Note that the definition does not separate between product-diversified, market-diversified and pure conglomerates. It focuses on the percentage of their holdings across firms or markets in a given jurisdiction. Also note that this definition does not extend or take into account concentration levels in international markets, which might also in some instances affect competition and welfare. 12 Tamir Agmon & Ami Tzadik, Business Groups in Israel (The Research and Information Center of the Israeli Parliament, 2010).13 Stijn Claessens, Simeon Djankov & Larry Lang, The Separation of Ownership and Control in East Asian Corporations, 58 J. OF FIN. ECON. 81 (2000). In Singapore the problem is further exacerbated by the f presence of many large and resource-rich Government-Linked Companies. See, e.g., Burton Ong, The Origins, Objectives and Structure of Competition Law in Singapore, 29(2) WORLD COMPETITION 269, 272-4 (2006).

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aggregate concentration, even some European countries suffer from high levels of aggregate concentration. In Sweden, for example, one family controlled until recently roughly half of the market capitalization of the Stockholm Stock Exchange. True, the phenomenon does not characterize important economies like the US and the UK, but it raises significant issues for many other jurisdictions around the world.

As economic studies have clearly indicated, high levels of aggregate concentration can have significant impact on competition and welfare. On the one hand, business groups can strengthen competitive pressures. The substantial resources and varied experience of conglomerates, as well as their economies of scale and scope (e.g. distribution, marketing, billing, etc.) often enable them to enter markets more readily than other firms, especially when entry barriers are high. Moreover, their vast financial means and diversified holdings portfolios enable their business units to tap into a larger pool of retained earnings, thereby enabling them to take more risk in product development programs or in entry into new markets and increase their ability to overcome short-term financial obstacles. Where governments and market institutions do not function well, conglomerates may allow firms to overcome such obstacles. Most importantly, they may overcome what is known as missing institutions problems arising from inefficient enforcement of contracts and from inefficient external financial markets.15 Moreover, group reputation substitutes for underdeveloped legal and regulatory mechanisms that leave outside investors vulnerable to exploitation risks and information asymmetries in the market.16 Conglomerates might also create scale economies in recruitment and in the development of human resources. Accordingly, conglomerates may have positive effects on the competitiveness of firms and markets.17

At the same time, however, high levels of aggregate concentration raise significant competitive concerns.18 Aggregate concentration might increase the instance of

14 See, e.g., Stijn Claessens, Simeon Djankov, Joseph Fan & Larry Lang, The Benefits and Costs of Internal Markets: Evidence from East Asia, 7 EMERGING MARKETS REV. 1(2006); Mara Faccio & Larry Lang, The Ultimate Ownership of Western European Corporations, 65 J. OF FIN. ECON. 365 (2002);See Randall Morck, Daniel Wolfenzon & Bernard Yeung, Corporate Governance, Economic Entrenchment, and Growth, J. OF ECON. LITERATURE 43(3) 655 (2005) for a survey of studies. There are many reasons for the development of such groups, many of which are not related to size.15 See, e.g. Takeo Hoshi, Anil Kashyap & David Scharfstein, Corpotate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups, Q. J. OF ECON. 106(1) 33 (1991) ; Tarun Khanna & Krishan Palepu, The Right Way to Restructure Conglomerates in Emerging Markets, 77 HARVARD BUS. REV.125 (1999); Yishai Yafeh & Tarun Khanna, Business Groups in Emerging Markets: Paragons or Parasites?, 45 J. OF ECON. LITERATURE 331 (2006).16 Tarun Khanna & Krishan Palepu, Is Group Affiliation Profitable in Emerging Markets? An Analysis of Diversified Indian Business Groups, 55(2) J. OF FIN. 867 (2000).17 See also Ronald W. Masulis, Peter K. Pham & Jason Zein, Family Business Groups around the World: Financing Advantages, Control Motivations and Organizational Choices, 24(11) REV. OF FIN. STUD. 3556 (2011).18 I shall not touch here other concerns, such as agency problems resulting from pyramidal holdings which are less relevant to competition concerns, although they enter the welfare analysis. See, e.g., Lucian Aye Bebchuk, Reinir Kraakman & George Triantis, Stock Pyramids, Cross-Ownership and Dual Class Equity: The Mechanisms and Agency Costs of Separating Control from Cash-Flow Rights, in CONCENTRATED CORPORATE OWNERSHIP 445 (Randell K. Morck ed., 2000); Heitor Almeida &

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oligopolistic coordination in and across markets. Given their current and potential multi-market contact, conglomerates are often likely to create a reciprocal status-quo, thereby not entering each other's markets or not engaging in aggressive competition in markets in which they potentially compete.19 Conglomerates might also increase barriers for the entry or expansion of competitors into markets in which they operate. For one, conglomerates may find it more profitable to engage in predatory behaviour, because such conduct has wide externalities: it signals to competitors in the many markets in which they operate that the price of competition will be high. These effects, in turn, might lead to stagnation and poor utilization of resources, which negatively affect growth and welfare.20 A study of the Israeli market, for example, has shown that firms controlled by conglomerates usually had lower growth rates and were less profitable but were more likely to survive than firms not belonging to such conglomerates.21

The second major concern is a political economy one: given their size and economic impact, large conglomerates may well attempt to, and sometimes succeed in, translating their economic power into political power in order to create, protect and entrench their privileged positions, thereby enjoying benefits such as government protection from the perils of competition in the form of government-erected barriers to the entry and expansion of their rivals.22 The greater the protection, the larger the profits that can be used for future lobbying.23 Moreover, a concentrated economic landscape also implies that lucrative employment opportunities are often quite concentrated in conglomerates, thereby possibly limiting efficient regulation by some regulators seeking future employment opportunities in the private market.24 Of course, regulatory capture can be limited to certain markets, especially if sector-specific regulators operate only in some of the markets in which the conglomerate has holdings. Still, the conglomerate might still be close to the ears of legislators (which can be viewed as "super-regulators") and regulation in one market might have spill-over externalities in related markets. Importantly for our analysis, regulatory capture may have cumulative effects, if barriers to entry are raised in many markets in parallel. Ayal argues that conglomerates also harm democracy, since they limit the autonomy that comes from maintaining competition among many players.25

Daniel Wolfenzon, Should Business Groups be Dismantled? The Equilibrium Costs of Efficient Internal Capital Markets, 75 J. OF FIN. ECON. 133 (2006). 19 See, e.g., CONCENTRATED CORPORATE OWNERSHIP (Randell K. Morck ed., 2000).20 Id; Morck, Wolfenzon & Yeung, supra note ?. 21 Agmon & Tzadik, supra note ?.22 See e.g., Leonard Weiss, "The Extent and Effects of Aggregate Concentration," 26 J.L. & Econ. 429 (1983); Louigi A. Zingales, CAPITALISM FOR THE PEOPLE: RECAPTURING THE LOST GENIUS OF AMERICAN PROSPERITY (2012). For regulatory capture see, e.g., George Stigler 1981, Sam Pelzman 1976, Laffont and Tirole, 1991, chapter 11.23 See, e.g., Morck, Wolfenzon & Yeung, supra note ?.24 e.g., Che Y.K., ‘Revolving Doors and the Optimal Tolerance for Agency Collusion’ (1995) 26 RAND JOURNAL OF ECONOMICS 378; Salant, D. "Behind the Revolving Door: A New View of Public Utility Regulation" 26 RAND JOURNAL OF ECONOMICS 362 (1995).

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Furthermore, often the public is highly affected by such conglomerates, through employment or savings or as suppliers and consumers, a fact which implies that such conglomerates might be considered "too big to fail" and be protected by the government from competitive forces that might erode their power and harm the public in the short-term. This creates a problem not only at times of bailouts, but also creates economic power while the business is thriving.26 The fact that the specific firms in the conglomerate are often tied in mutual guarantee agreements implies that a significant harm to each part of the conglomerate can affect the viability of other parts, thereby creating a domino effect, a fact which might increase governmental protection for any part of the conglomerate.

A related concern focuses on the ability of public opinion to limit the welfare-reducing effects of conglomerates. Because of the size of their advertising budgets as well as their political power, their coverage in at least some of the media outlets might be more favourable and not expose all the harm they create to the competitiveness of the economy, thereby reducing the knowledge of the public of such effects which is an essential ingredient in the ability of public opinion to bring about a change in market conditions. Note that such effects may exist regardless of competitive concerns in specific markets,27 although competition among conglomerates can often significantly reduce such political economy effects.

Competitive forces are further stifled when conglomerates also control major financial institutions. In such situations, it is often harder for new or maverick competitors to get the credit needed to enter or expand in markets which the conglomerate controls or in which a large loan to an existing competitor has been granted. Indeed, a vast literature has shown that economic growth requires that savings be directed into value creating investments. Perfect capital markets allocate capital to each investment opportunity until its marginal return equals the market clearing equilibrium interest rate. However, when capital markets are imperfect, inequality reduces investment opportunities, worsens borrowers’ incentives, and generates macro-economic volatility.28 All the factors explored above lead to what is known as the entrenchment problem, whereby "Oligarchic Capitalism" is difficult to change through market forces alone.29 Many of the negative effects delineated may exist regardless of competitive concerns in specific markets.30

25 Adi Ayal, "The Market for Bigness: Economic Power and the Competition Authorities' Duty to Curtail it" 2 JOURNAL OF ANTITRUST ENFORCEMENT 1 (2013).26 Id.27 See, e.g. Lawrence J. White, What's Been Happening to Aggregate Concentration in the United States? (And Should We Care?), N.Y. UNIV., working paper No. EC-02-03 (2001), http://archive.nyu.edu/bitstream/2451/26182/2/2-3.pdf (last visited Oct. 21, 2012).28 For a survey of the literature see, e.g. Philippe Aghion, Eve Caroli & Cecilia Garcia-Penalosa, Inequality and Economic Growth: the Perspective of the New Growth Theories, 34 (7) J. OF ECON. LITERATURE 1615 (1999).29 Morck, Wonfenson and Yeung, 2005, supra note ?.30 White, 2001, supra note ?.

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It is important to emphasize that aggregate concentration does not present new competition concerns. Rather its raises traditional issues in new guises and combinations. Yet the aggregative nature of such concerns and their extent may increase the importance of such issues to the point that they require separate recognition. Indeed, as many studies have shown, when aggregate concentration is high, the unit which is relevant for economic analysis is often no longer the freestanding firm, or the specific market in which it operates, but rather the economic unit of which it is part through formal (e.g. ownership) and non-formal (e.g. family ties) connections and its effects across markets. Indeed, in the past two decades the larger economic unit (referred to in this chapter as a conglomerate) has become center stage in finance, corporate governance, innovativeness, competitiveness and other economic analyses. It is time that it is taken into account in competition law as well, as error costs, especially of false negatives, are high.31

III.B Aggregate Concentration and Superior Bargaining Position

On this background, let us now explore the connection between high aggregate concentration levels and significant bargaining power. Significant bargaining power usually arises from significant market power in the market in which it is exercised. Accordingly, the easiest case arises in a market in which the conglomerate enjoys significant market power. Yet even in such markets aggregate concentration can play a role in the strengthening of the bargaining power of the conglomerate in that market, beyond that simply reflected in its market shares, for several reasons. Most importantly, the fact that the dominant firm is part of a large conglomerate might increase barriers to entry or to expansion in that market. As noted above, other conglomerates, which are often in the best position to challenge its market position, might refrain from entering or expanding in this market in order to protect the reciprocal status quo that exist between them across markets. Entry or expansion create fear of retaliation in other markets in which they operate, which would disrupt the oligopolistic coordination they all enjoy. Even firms that do not belong to conglomerates might think twice before entering into a market in which the dominant firm's market power arises, at least in part, from economies of scale in broader but interconnected markets or from political economy effects. Accordingly, the simple paradigm often used to justify the market system - whereby if one can create a better product or create the existing one more efficiently than other firms operating in the market then one would be able to compete and succeed in it- does not always hold, at least not in this reductive form. Therefore, entry barriers might even be higher than they appear from a simple analysis of the specific market's conditions.

The more interesting yet less trivial case arises with regard to markets in which the conglomerate does not (at least as of yet) enjoy a dominant position. Thus, the often-used market power test in competition law (which often uses market shares in a specific market as its starting point) would not indicate any significant market power

31 See Gal, Merger Policy, supra, note ?.

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and the resulting bargaining power. Once again, aggregate concentration requires us to widen our analysis, since the conglomerate might enjoy significant bargaining power even in markets in which it does not hold a dominant position, which result from its powers in other markets.

First, if the conglomerate enjoys significant market power in related markets, it might leverage this power. For example, if a firm enjoys dominance in the market for beers, it might use this market power in order to leverage it into the market for liquors which are sold at the same outlets. Such leverage might be based on economies of scale (e.g., in distribution and transaction costs) which create legitimate comparative advantages, or on the creation of illegitimate advantages through abuse of dominance, for example through illegal tying, exclusivity requirements or rebates.32 While the latter might infringe competition law, in an economy with repeat players private suits are less likely to be brought based on such charges and firms (especially distributors and suppliers) are less likely to complain or to assist the government in transparent evidentiary hearings. Moreover, oftentimes it might be difficult for firms contracting with the monopolist to determine whether the conduct is indeed anticompetitive, given potential offsetting pro-competitive effects such as savings in transaction costs. Therefore the "regular track" of competition law might not always provide an efficient and workable solution for such instances. Note that as emphasized earlier, the conglomerate might not need to take any steps in the relevant market, but rather signal to its competitors in all markets that it will treat threats to its market position or to its demands aggressively, by taking such steps in other markets in which it operates.

Second, if the firm has significant ties with the regulator due to regulatory capture in related markets, firms might fear that it might use its power in order to harm them, if they do not agree to its terms.33 The "too big to fail" concern further strengthens the fear for governmental protection of the conglomerate. Control of major financial institutions and/or media outlets by the conglomerate might also increase the conglomerate's bargaining power, facts that are generally not taken into account in a simple market power analysis.

Third, conglomerates' multi-market operation might induce suppliers and distributors not to challenge the conglomerate's demands, especially if access to essential inputs is controlled by them or by other conglomerates with which they enjoy a comfortable

32 See, e.g, OECD, Portfolio Effects in Conglomerate Mergers 2001: The probability of a reduction in welfare as a result of tying or bundling of complements is higher the more the following elements are present: a high degree of market power in the "tying" product (or one of the bundled products); rivals' costs are significantly increased; rivals find it impossible or unprofitable to match the tying/bundling strategy; prices will eventually rise above pre-bundling levels in the markets where rivals' costs are raised (i.e. buyers will be unable to prevent a price rise, firms will be unable to profitably enter or re-enter after prices have risen, and the tying firm will have an incentive to raise prices above pre-merger levels).33 Ayal takes this argument one step further and argues that "as more governmental actors are indebted to a particular business group, it becomes more difficult for others to refuse it." Ayal, supra note ?, p. 6.

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status-quo.34 The following example is illustrative. Suppose that the major financial institution that supports small businesses is controlled by the same conglomerate with which the small firm is engaged in bargaining in another market. It might fear (irrationally, perhaps, at least under some circumstances), that it cannot stand up to the conglomerate too firmly, as it might reduce its ability to receive needed loans. One might carry this argument further: in an input market controlled by several conglomerates which have multi-market contact, coordination might also extend to cases in which the interests of any of them would be harmed in a related market. As Ayal argues, in order to limit the effects of such economic power, the small firm must not only enter the relevant product markets, but also create a network of contacts and input providers, well beyond the obvious production facilities and marketing venues.35

The above analysis implies that market power should be analyzed through a wider lens, which takes account not only of the existing market power in a specific market, but also its effects on other markets in which the parent or holding companies of the parties to the transaction operate. Such effects include, of course, portfolio effects, but may go beyond them to include the effects of aggregate concentration on how the market operates. Indeed, it might be the case that a transaction does not have significant effects in the market in which the specific conduct takes place, yet significantly affecting the economy. It is important to emphasize that recognition of aggregate concentration effects does not prevent a parallel and even cumulative recognition of market concentration effects, and both come together, especially in the simpler cases analyzed above. It is just that a focus on market concentration alone provides only part of the picture.

This suggestion, it should be emphasized, extends beyond traditional competition law enforcement, which focuses on each specific geographic and product market by itself. It moves from the micro-analysis level to a macro-analysis one.

Chapter IV: Abuse of Superior Bargaining Position Prohibition: Theoretical and Empirical Analysis

IV.A. Introduction

On this background, we ask whether competition laws which prohibit the abuse of superior bargaining position can serve as an efficient tool for limiting at least some of the problems created by high levels of aggregate concentration. Such regulation raises interesting and under-explored issues that require a multi-factored analysis. One set of questions centers on compatibility and efficiency of competition law's analytical and regulatory tools to deal with such issues.36 The question arises, inter alia, because the competitive issues usually flow from the structure of the market (which could result

34See, e.g., Robson and Rawnsley, "Cooperation or Coercion? Supplier Networks and Relationships in the UK Food Industry" (2001) 6 International Journal of Supply Chain Management 39.35 Ayal, supra, note ?, p. 10.36 Daniel Crane, THE INSTITUTIONAL STRUCTURE OF ANTITRUST ENFORCEMENT (2011).

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from internal growth) or from conduct which is generally regarded as lawful (most importantly, oligopolistic coordination). Furthermore, most competition law tools focus on narrowly defined markets that do not take economy-wide economic, political or social effects into account, despite the fact that such effects sometimes affect welfare more than market-specific ones. This micro-analysis does not easily translate to the macro-analysis often needed to deal effectively with aggregate concentration.

Furthermore, institutional as well as democratic mandate issues arise: whether the Competition Authority is the proper body to make decisions that affect the economy in many inter-connected ways, and even if so, which considerations should it take into account (e.g., should only competitive issues be taken into account or whether also broader public policy issues that might come under the "public benefit" rubric of some competition laws).

Indeed, many jurisdictions do not deal with aggregate concentration issues under their competition laws. The U.S. is an interesting example: the roots of U.S. antitrust can be traced to concerns regarding the effects on the economy and on democracy of large business groups (trusts) which controlled a significant and diversified part of the economy.37 Yet the focus in the U.S. has shifted and today little weight if any is given to pure concerns of aggregate concentration, partially because other regulatory tools (e.g., tax on pyramidal structures) have limited aggregate concentration levels. Some jurisdictions, such as New Zealand, even specifically state that the focus of their competition law is on competition in "a market," thereby disregarding pure aggregate concentration effects.38 In other jurisdictions the most relevant concerns focus on portfolio (or range) effects, when a conglomerate merger involves complementary products.39 This approach is dominant in most of the jurisdictions around the world.

With these questions in mind, we now turn to the experience of two jurisdictions with their application of the prohibition of abuse of superior bargaining position to regulate aggregate concentration: South Korea and Japan.

IV.B. South Korea40

1. The Statutory Provision

The statutory basis for the prohibition of abuse of superior bargaining position in Korea can be found in Article 23 of the Monopoly Regulation and Fair Trade Act “MRFTA”), which proscribes unfair trade practices. Paragraph 4(1) of the Article prohibits “trading by unjustly using a superior bargaining position”.41 The law

37 e.g., Lawrence J. White, "Trends in Aggregate Concentration in the United States," 16 JOURNAL OF ECONOMIC PERSPECTIVES 137 (2002).38 New Zealand Commerce Commission, New Zealand Mergers and Acquisitions Guidelines.39 OECD, 2001.40 All the cases referred to in this section are in Korean in their original. The quotations cited in this section are translation of the original. 41 Monopoly Regulation and Fair Trade Act (“MRFTA”), Law No. 3320 of 1980, art. 23(1)4, available at http://eng.ftc.go.kr/bbs.do?command=getList&type_cd=62&pageId=0401. Article 23(3) proceeds to

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enumerates five instances of abuse of superior bargaining position, namely forced purchase, forced provision of benefit, imposition of sales target, imposition of disadvantage, and interference with business management and operations. In particular, imposition of disadvantage is defined as an “[a]ct of causing a disadvantage in the process of carrying out the trade, setting or changing the trading condition to the disadvantage of the counterpart using methods other than … forced purchase, forced provision of benefit, and imposed sales target.”42

2. The Guidelines and the decisional practice

2.A Introduction

The Korean Fair Trade Commission (“KFTC”) has issued Guidelines43 which explain in greater detail the enforcement and analytical approach of the KFTC with respect to unfair trade practices, including abuse of superior bargaining position. In the Guidelines, the KFTC explains the rationale for the prohibition of abuse of superior bargaining position as follows: “An undertaking may abuse its superior position and exploit undertakings with an inferior position by imposing penalties, such as mandating purchase of products, or interfering with management decisions. Such conducts [sic] are prohibited as they hurt independent growth of other undertakings and harm fair trade.”44

The KFTC provides a clarification on the scope of the prohibition by stating that it “does not apply to cases in which an undertaking, at the beginning stage of a trade, was able to choose its counterparty on its own and engaged in trade in full knowledge of the terms of the agreement, and the participating parties abide by the agreed terms.”45 The focus on lack of choice is reinforced by the next sentence, which states that “[t]he Act applies to cases in which an undertaking, already engaged in trade, uses its superior position, established due to reasons such as lack of substitutes, to impose disadvantage to [sic] its counterparty.”46 The reference to lack of substitutes or choice may be taken to refer to market power. After all, a firm has market power when its counterparties and consumers have no choice but to trade with or purchase from it. However, the reference of “already engaged in trade” can be taken to refer to an ongoing contractual relationship between the parties, which suggests that the focus of the prohibition is on ex post revision of contractual terms. This is important, because bargaining power which results from economic power is not necessarily

explain that “[t]he types and criteria of unfair trade practices shall be provided by the Presidential Decree.” Article 36 of the Enforcement Decree of the MRFTA in turn states that details concerning the unfair trade practices proscribed in Article 23 of the MRFTA are to be set out in Table 1-2.42 Enforcement Decree of The Monopoly Regulation and Fair Trade Act, Table 1-2, available at http://eng.ftc.go.kr/bbs.do. 43 Korea Fair Trade Commission, Guidelines for Assessment of Unfair Trade Practices, available at http://eng.ftc.go.kr/bbs.do.44 Id. at, § II.6.(1).45 Id. at § II.6.(2)(A).46 Id. at § II.6.(2)(B).

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limited to ex post changes in contractual agreements and oftentimes can occur at the time the initial contract is signed .

2.B Existence of A Superior Bargaining Position

The Law provides that a superior bargaining position is to be established in light of factors such as the “ease of securing a substitute party for trade, level of income dependency in the relationship, control or supervision involved, and characteristics of goods or services traded.”47 The Guidelines further state that the fact that the counterparty had no choice but to accept the abusive conduct, such as forced purchase demand, shows that the undertaking has a superior bargaining position. Ease of securing a substitute party for trade refers to “whether or not it is possible to find another undertaking to trade with at a low transaction cost.”48 The reference to low transaction cost suggests that the standard is not high. What needs to be proved is not absolute impossibility, but only that a replacement cannot be found without incurring higher transaction costs. The replacement will only be deemed to be adequate if it does not result in reduction in trading volume or does not present difficulties for the counterparty to recover its investments.49 In other words, the Guidelines make it quite easy to demonstrate a lack of choice.

The Guidelines proceed to enumerate a number of scenarios in which a superior bargaining position is likely to be found. These include “large retailer and companies doing business with the retailer”50, “manufacturer and parts supplier”51, and “broadcasting company and broadcasting program supplier”52. In South Korea, many of the large retailers and leading manufacturers are part of a conglomerate. Therefore, even though the Guidelines do not specifically mention conglomerates, the applicability of abuse of superior bargaining position to conglomerates is clear.

Also noteworthy is the mention as a likely scenario of superior bargaining position where “[s]ignificant damage is likely to be caused due to [a] switch in business partners, due to the size of investment made to maintain business relationship with the specific undertaking”53. This can be taken to refer to situations in which the supplier has made substantial relationship-specific investment in the supply relationship, and comports with justifying abuse regulation on the grounds of encouraging relationship-specific investment.

The KFTC has consistently applied a multi-factored test to determine the existence of a superior bargaining position, such as the Korea Sony Pictures Buena Vista case54

47 Id. at § II.6.A.(2)(B).48 Id.49 Id.50 Id.51 Id.52 Id.53 Id.54 Abuse of Superior Bargaining Position by Korea Sony Pictures Releasing Buena Vista Movie Co. Ltd., Korea Fair Trade Commission Case 2007-[][]-4174, at § Da.(2).

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and the Hyundai Department Store case55. In particular, the KFTC emphasizes the importance of substitutability of the defendant’s business to the plaintiff: “if difficulties arise in finding alternative businesses to trade with at low switching costs, or disadvantages arise after switching to alternative businesses …, then it is not easy for one to secure a substitute business to trade with.”56 In the Korea Land and Housing Corporation case, the KFTC put forward a formulation that has been repeated in a number of other cases. It stated that “[w]hen establishing a superior bargaining position, it is sufficient to find that the subject is in a relatively superior position or that the subject can exert significant influence on the counterparty’s business activities.”57 The KFTC proceeded to list these factors for consideration: the market in which the parties operate, the gap between the parties’ business capacities and their scope of business activities, and the characteristics of the product or service. If the KFTC takes into account the affiliates of the defendant in the same corporate group in its assessment, these factors would suggest that a conglomerate company would be more likely to be found to have a superior bargaining position. First, a conglomerate would obviously operate in many more markets than an individual company. Second, the gap between the business capacities of a conglomerate and a small business is also going to be considerably larger than if the defendant is an individual company. The same also applies to the scope of business activities. Lastly, a conglomerate is likelier to be able to exert significant influence on the counterparty’s business activities if its group companies transact with the counterparty in multiple markets. Even when such wider considerations are taken into account, the question arises as to what is the significance attached to market power in the specific market, relative to economic power. In the Hyundai Department Store case, the KFTC referred to a pronouncement by the Korean Supreme Court that superiority of bargaining power refers to relative superiority in relation to one’s trading partner, and not an absolute superiority in terms of market monopoly.58 This statement clearly draws a distinction between superior bargaining power and market power, which would imply that common indicia of market power, such as market share, would not play a significant role in the analysis. However, the Korean Supreme Court has also made contradictory statements that seem to suggest that there is a link between market power and superior bargaining position. In the Seoul Metropolitan Rapid Transit case, the court noted that the defendant could not be said to be in a superior bargaining position because it was not in a monopolistic position.59 This seems to suggest that a non-dominant firm would not be deemed to have a superior bargaining position, which is contrary to the general understanding of the doctrine, and would limit the ability to capture economic power resulting from aggregate concentration under the prohibition.

55 Abuse of Superior Bargaining Position by Hyundai Department Store, Inc., Korea Fair Trade Commission Case 2008-[][]-1962, at § 2.C.(2).56 Id.57 Abuse of Superior Bargaining Position by Korea Land and Housing Corp., Korea Fair Trade Commission Case 2010-#0242, at para. 31.58 Hyundai Department Store, supra note 73, at § 2.C.(2).59 Seoul Metropolitan Rapid Transit Corp., Korean Supreme Court [][]93 [] 4984 (July 27, 1993).

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A cursory review of the KFTC’s decisional practice would seem to suggest that the KFTC pays attention to the defendant’s market power in the specific market which the plaintiff contracts with. The KFTC usually begins each decision with a very detailed analysis of the relevant market. Even though the KFTC stops short of explicitly defining the market, it does specify the market that is the subject of the analysis. Moreover, the KFTC tries to ascertain the defendant’s market share and relative position in the market. For example, in the Hyundai Department Store case, the KFTC highlighted the fact that Hyundai held a 21% market share and was number two in the industry in 2007.60 In the Lotte.com case, the KFTC mentioned that Lotte.com had ranked second in the internet shopping standard mall market.61 In the Sony Pictures Buena Vista case, the KFTC referred to the defendant’s dominant market share for several years and the fact that there are no perfect substitutes for the defendant’s movies.62 Likewise, in the LG Electronics case, the KFTC referred to the defendant’s market share of over 50% in the home appliance supply market.63 All these firms were found to hold a superior bargaining position. Yet it is worth mentioning that the KFTC does not always emphasize market share. In the Korea Land and Housing Corporation case, despite the fact that the defendant’s market share in the residential property construction market was close to 50%, the KFTC did not utilize this fact in establishing that the defendant had a superior bargaining position. Instead, the KFTC chose to emphasize how private construction companies were constantly in need of construction contracts from the defendant.64

Within its analysis of superior bargaining position, the KFTC seems to give weight to economic power concerns. Of particular relevance for our present purpose is the Lotte.com case, in which the KFTC emphasized that the defendant was one of the 77 companies affiliated with the Lotte Conglomerate.65 The KFTC observed that “the suppliers’ business activities, such as the expansion of their businesses and promotion of their products, would be inevitably subject to the influence of their trades with the defendant, who has connections with the powerful conglomerate.”66 A somewhat similar factor is the fact that the counterparty relies on the defendant in multiple markets. Being part of a conglomerate may augment one’s bargaining power for a variety of reasons, one of which is that the counterparty may depend on various companies within the conglomerate for business. Offending one of them risks losing business from all of them. In the Korea Land and Housing Corp. case, the KFTC noted that the construction companies relied on the defendant in civil engineering construction projects and city infrastructure construction projects in addition to

60 Hyundai Department Store, supra note 73, at § 2.C.(2).61 Abuse of Superior Bargaining Position by Lotte.com Co. Ltd., Korea Fair Trade Commission Case 2012-[][]-0591, at § 2.C.2).A).62 Sony Buena Vista, supra note 71, at § Da.(2).63 Abuse of Superior Bargaining Position by LG Electronics Co. Ltd., Korea Fair Trade Commission Case 2011-[][]-2555, at § 2.C.2).A).64 Korea Land and Housing, supra note 75, at para. 34.65 Lotte.com, supra note 79, at § 2.C.2).A).66 Id.

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residential property construction.67 These two examples indicate that the KFTC takes into account the conglomerate connection and multi-market contact in its determination of a superior bargaining position. Hyundai used to be one of the largest conglomerates in Korea prior to the Asian Financial Crisis, with its business spanning automobile manufacturing, shipping, retail, finance, etc.68 After the crisis, the Hyundai Group was broken up into a number of companies, of which Hyundai Department Store Group is one. Even though they are technically separate companies, they continue to be run by relatives of the founder.

One way to adapt the KFTC’s focus on market share for the purpose of determining a superior bargaining position of a conglomerate company is to consider the market share of the affiliates of the defendant which also have business dealings with the counterparty. In the context of abuse of superior bargaining position, the key question is how much the contractual counterparty depends on the defendant for business. If the affiliates of the defendant are assumed to act in concert, then it would make sense to also look at the market share or trading volume across multiple markets. How much market share or trading volume is sufficient would have to be determined on a case-by-case basis.

The KFTC also occasionally mentions the difference in size between the defendant and the counterparty. In the LG Electronics case, for example, the KFTC referred to the significant gap between the business capacity of the defendant and the counterparties, and emphasized that the counterparties were “small enterprises”.69 In the Korea Land and Housing Corp. case, the KFTC also referred to the significant gap between the business scale and power of the defendant and the counterparty construction companies.70 As mentioned earlier, this consideration is likely to lead to a finding of superior bargaining position for a conglomerate company given that a conglomerate is likely to dwarf a small business71

2.C Types of Abuse

Forced Purchases

The Guidelines discuss the various forms of abuses one by one. Forced purchase is defined as “an undertaking forcing its trading counter[party] to purchase goods or services even though the counterparty has no intention of doing so.”72 The purchase must be made under coercion, which can be proved by the existence of penalty for failure to purchase and other objective facts suggesting that the counterparty was

67 Korea Land and Housing, supra note 75, at para. 35.68 Hyundai Group website, available at http://www.hyundaigroup.com/eng/.69 LG Electronics, supra note 81, at § 2.C.2).A).70 Korea Land and Housing, supra note 75, at para. 35.71 Finally, in what may be considered a nod to the prevention of expropriation of relationship-specific investment rationale for abuse regulation, the KFTC alluded to the difficulty of the contractual counterparty in recovering investment costs as a factor for establishing a superior bargaining position in the Hyundai Department Store case.72 Id. at § II.6.A.(1)(A).

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forced to make the purchase. This is quite different from the approach in Japan, where the JFTC seems to be place quite a bit of emphasis on whether the goods or services to be purchased have anything to do with the subject matter of the contract.

The Guidelines provide a few examples of conduct that may be considered forced purchase. These include: “an undertaking...supplying unordered goods and refusing to accept returned goods from a seller in a regular business relationship”73, and “[a]n undertaking...forcing another undertaking in its regular business relationship to purchase its goods or services [] from a designed [sic] company”74. This prohibition is similar, in essence, to tying. Forced purchases may be particularly common with conglomerates, given their broad business scope. A conglomerate company may want to drum up business for an affiliate through forced purchases.

As is true for all five types of abuse enumerated in the Law, the Guidelines emphasize that the primary consideration in determining the legality of the conduct is whether it “violates principles of fairness in trade”, which is obviously not self-defining. Unfairness of the forced purchase can be established in light of factors such as “the objective of the conduct, likelihood of anticipation by the counterparty, …ordinary course of trade in the industry, damage [] caused to the counterparty as a result of the forced purchase, and relevant laws.”75 On the likelihood of anticipation, the Guidelines explain that if the forced purchase was “clearly predictable or if the purchase is specified in the contract from the beginning, such forced purchase shall not be considered unfair”76. This seems to suggest that at least with respect to forced purchase, the abuse of superior bargaining position only applies to ex post contractual revision, which substantially narrows its scope.

The Guidelines provide for two justifications for forced purchase. It is stated that even if a forced purchase violates principles of fairness, it is nonetheless legal if its efficiency-enhancing effect appreciably exceeds its anticompetitive effect or if the forced purchase is justified by other reasonable justifications. The first defense in particular is interesting because it presumes that the forced purchase has anticompetitive effect, which in many instances it may not. It is also not easy to imagine what kind of efficiency-enhancing effect can be created by a forced purchase.

The analysis of forced purchases in the KFTC’s decisional practice is relatively simple. The KFTC tends to emphasize that the counterparty should be allowed to decide on its own what to purchase and how much, and yet it was forced by the defendant to purchase goods designated by the defendant. Unsurprisingly, it is relatively difficult to justify a forced purchase. This is apparent in the Seoul City Gas case, in which the defendant actually forced the counterparty customer service centers to purchase specific gifts for their employees.77

73 Id. at § II.6.A.(3). 74 Id.75 Id. at § II.6.A.(2)(B).76 Id.

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Forced Provision of Benefit

The Guidelines define forced provision of benefit as “an undertaking forcing its trading counterparty to provide financial benefits, e.g. money, goods, and services.”78 Examples of potential instances of forced provision of benefit include: “[a]n undertaking, without a justifiable reason, requests monetary or special treatment, e.g. sponsorship or contribution, that are not part of the terms of the trade, from the supplier of the goods … or services”79, and “[a] large retailer charges other businesses or shops fees, such as rental fees or POS fees, that are not specified in the contract.” 80 Conceptually, such kind of leveraging is no different from an undertaking forcing a contractual counterparty to purchase goods from a designated third party that is said to be a likely violation above, although it is tying turned on its head: the buyer is the provider of the additional services. In both instances, one undertaking makes use of its bargaining position to benefit another undertaking. Yet the possible limitation of the law to ex post revision of contractual terms, as apparent from the two examples above, limit the scope of this prohibition.

Of particular relevance to the central question of this paper is the statement in the Guidelines that such conduct “also includes an undertaking forcing provision of benefit using the superior position of its affiliate.”81 This scenario of leveraging the superior bargaining position of an affiliate to extract financial benefit from a contractual counterparty is particularly likely with a conglomerate.

The assessment criteria for determining the legality of forced provision of benefit is similar to those for forced purchase. The Guidelines assert that the primary consideration is whether the conduct violates principles of fairness in trade.82 The factors to be considered are the same as those under forced purchase.83 Lastly, the Guidelines provide for the same two defenses of efficiency enhancement and reasonable justification.

Imposition of Sales Target

Imposition of sales target is defined as “an undertaking [] forcing its trading counterparty to meet a sales target.”84 This conduct is different from the previous two in that the previous two are more likely to be perpetrated by a powerful buyer, while the imposition of a sales target is most likely to be done by a powerful seller. Unlike the prohibition of forced provision of benefit, the Guidelines explicitly provide that the prohibition applies regardless of whether the sales target is contained in the

77 Abuse of Superior Bargaining Position by Seoul City Gas Co. Ltd., Korea Fair Trade Commission Case 2013 #1622, at paras. 51-62.78 Guidelines, supra note 40, at § II.6.B.(1)(A).79 Id. at § II.6.B.(3).80 Id.81 Id.82 Id. at § II.6.B.(2)(A).83 Id. at § II.6.B.(2)(B).84 Id. at § II.6.C.(1)(A).

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contract or only imposed ex post orally.85 The criterion for determining the legality of the imposition of a sales target is whether there is coercion involved in the imposition of the target.86 Presumably the existence of coercion signifies unfairness. The Guidelines state that coercion could be found regardless of “whether the target was excessive, whether the counterparty actually met the target, or whether penalty was actually used when the target was not met.”87 The Guidelines go on to explain that coercion will be deemed to exist if a penalty is stipulated for failure to meet the target. However, coercion will not be deemed to exist if instead of a penalty, a financial reward such as a subsidy is paid for successfully meeting the target. Again, the Guidelines provide for the efficiency enhancement and reasonable justification defenses. Examples of potential violation include situations when an undertaking cuts off supply to a counterparty if the sales target is not met and when an undertaking unilaterally lowers payment to a counterparty when a sales target is not met.88

Again, conglomerate companies are likely culprits of such an abuse. In South Korea, many of the producers of goods and services are members of big conglomerates, such as car, electronics, electrical appliances, etc. Smaller retail businesses rely on these conglomerate companies for supply of goods and services, and are susceptible to pressure to meet sales targets. Even though the cases themselves do not involve the imposition of sales target, the relationship of conglomerate companies as suppliers of goods or services and smaller businesses as retailers or distributors is observed in the Sony Pictures Buena Vista case, the LG Electronics case, the GM Daewoo case89.

Imposition of Disadvantages

This is a catch-all category of abuse. The Guidelines classify imposition of disadvantages into two categories: (1) imposing disadvantage through setting or changing terms of trade, which refers to “an undertaking setting or changing the trading condition to the disadvantage of its counterparty, by establishing original conditions or revising existing conditions in a way that places the other party at a disadvantageous position;”90 and (2) imposing disadvantage through execution of trade, which refers to “an undertaking imposing disadvantage by refusing to fulfill [sic] the terms of trade or forcing its counterparty to [] execute certain practices in trade.”91 The assessment criteria for imposition of disadvantage is the same as those for forced purchase, which means that the counterparty’s expectation is one of the 85 Id.86 Id. at § II.6.C.(2)(B).87 Id.88 Id. at § II.6.C.(3).89 Abuse of Superior Bargaining Position by GM Daewoo Auto & Technology Co., Ltd, Korea Fair Trade Commission Case 2007-[][]-2749.90 Id. at § II.6.D.(1)(A). From this definition, it seems clear that the prohibition applies to ex ante imposition of unfair contract terms and ex post unilateral revision of contract terms. However, subsequent discussion in the Guidelines seems to cast doubt on this interpretation and suggests that it only applies to the latter. Regulated contractual terms include “all types of restrictive clauses, cost of purchase … or sales…, terms of price (including commission fee), method and timing of payment, conditions on returned goods, product inspection method, and contract termination conditions, etc.” Id.91 Id. at § II.6.D.(1)(B).

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factors to be considered.92 This directly contradicts the definition for imposing disadvantage through setting or changing terms of trade, especially the reference to “by establishing original conditions”. The same defenses as for the other types of conduct are provided for imposition of disadvantages. Examples of potential violation include an undertaking unilaterally changing its level of compensation in the contract, an undertaking delaying payment without paying the accrued interest, and an undertaking refusing to accept returned goods even though the return is done in accordance with the contract.

Imposition of disadvantages seems to feature fairly prominently in the KFTC’s decisional practice. Given the variety of practice that fall within this category, the mode of analysis is necessarily varied. In the Sony Pictures Buena Vista case, which concerned Sony Pictures’ requirement from theatres to make their payments ahead of the schedule stipulated in the contract, the KFTC by and large established the illegality of the conduct by stating that the conduct imposed a disadvantage on the counterparties, which had no choice but to comply with the demand. There was no real attempt to weigh the fairness of the conduct. Particularly noteworthy is the KFTC’s relatively cavalier dismissal of the defendant’s defense that accelerated payment schedule was necessary in light of the troubled financial status of some of the theatres. In the Lotte.com case, the conduct at issue was the defendant’s return of unsold goods to its suppliers against their will. The KFTC established the illegality of the return in light of a number of factors, most of which point to the unreasonableness of the return. The KFTC mentioned that the suppliers did not request the return of the goods and that there were no defects in the goods.93 Nor were they seasonal items. There was also no agreement that provided for the return of the goods. Overall, the KFTC believed that the forcible return of unsold goods unfairly transferred inventory risks to the suppliers, which created a disadvantage for them.94 Both defendants in these cases are part of a large conglomerate. Sony is involved in the manufacturing of electronics, electrical appliances, semiconductors, medical equipment, in addition to entertainment such as music and film.95 Lotte is one of the largest conglomerates in Korea and Japan. It is involved in food and beverages, hotel management, amusement parks, tourism, sports and health business, restaurants, real estate, trading, heavy chemicals, and finance, etc.96

In the LG Electronics case, the defendant required its agent stores, which referred customers to the defendant, to be jointly liable for non-payment by its customers. The KFTC ruled that the conduct was unjust and therefore illegal because the conduct unfairly passed on customer default risk to the agent stores even though it was the defendant that decided to enter into the contracts, because it was done against the will of the stores, and because the conduct deviated from the common practices in the

92 Id. at § II.6.D.(2)(B).93 Lotte.com, supra note 79, at § 2.C.2).B).94 Id.95 Sony website, available at http://www.sony.net/SonyInfo/CorporateInfo/.96 Lotte Group website, available at http://lotte.co.jp/english/group/index.html.

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industry.97 The LG Group is again one of the major conglomerates in Korea. It is involved in electronics, television manufacturing, chemicals, healthcare, life sciences, telecommunications.98 In particular, it is one of the largest mobile phone manufacturers in the world and is reportedly one of the four largest conglomerates in Korea.99

Similar reasoning applied to the Seoul City Gas case, in which the defendant required the customer service centers to pay for defaulted gas customers. The KFTC again relied on the fact that there was an unfair transfer of risk to the counterparty against the counterparty’s will to establish unfairness of the conduct.100 In the Korea Land and Housing Corp. case, where the defendant had requested for a change in design by the construction companies and then subsequently changed its mind and refused to pay for the requested change, the KFTC by and large determined that the conduct was an imposition of disadvantage because it deviated from normal trade practice and the defendant’s internal deliberation of the matter was irrelevant.

Despite the variety of the practices involved, one can see a few recurrent arguments, such as the fact that the conduct was against the will of the counterparty, which applies to every abuse of superior bargaining position case, and the fact that the conduct deviated from normal industry practice. The latter argument gives rise to the possibility that a conduct may be considered acceptable despite being patently unfair if it is in fact a standard practice in the industry. This stands in contrast with the approach in Japan.

Interference with Business Management and Operations

The last enumerated conduct that is prohibited by the abuse of superior bargaining position is interference with business management and operations. The Guidelines define it as “an undertaking interfering in the management and operations of its counterparty by imposing restriction on items manufactured, scale of facilities and equipment, quantity of manufacture, and terms of trade, or by giving orders or approval for appointment or dismissal of staff and executives.”101 The assessment criteria again are the same as for the other four abuses. Under the rubric of fairness, the Guidelines provide that an interference will not amount to a violation if the conduct is legitimate, i.e., for the purpose of exercising voting rights or collecting credit, or has reasonable justifications, such as when the conduct is necessary for the protection of investor or credit rights. Even if the purpose is legitimate, the Guidelines further impose a proportionality test to determine whether the conduct is proportionate to the purpose sought to be achieved and whether there are other

97 LG Electronics, supra note 81, at § 2.C.2).B).98 LG Corp website, available at http://www.lgcorp.com/about/affiliatesList.dev.99 Cho Mu-hyun, The Chaebols: The Rise of South Korea’s mighty conglomerates, CNET, Apr. 6, 2015, available at http://www.cnet.com/news/the-chaebols-the-rise-of-south-koreas-mighty-conglomerates/. 100 Seoul City Gas, supra note 93, at para. 33.101 Id. at § II.6.E.(1).

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appropriate means to achieve the same purpose. The same defenses as before are provided for interference with management and operation as well. Examples of potential violation include an undertaking demanding the appointment or dismissal of a specific executive in exchange for a loan.

The KFTC’s decisional practice suggests that the KFTC seems to focus on the consequence of the interference to the counterparty’s business operations. In the Hyundai Department Store case, Hyundai compelled its suppliers to share the login information on an information portal that would allow Hyundai to check the sales records of its competitors in real-time. The KFTC ruled that the conduct was unfair because it would force the suppliers to divulge accurate sales information of competing department stores to Hyundai and would force suppliers to take part in costly and ineffective sales promotion events to the detriment of the suppliers.102 It stated that the conduct “hindered the counterparties’ freedom of decision-making … [and] it is likely that the foundation of fair trade has been undermined.”103

C. Japan104

1. The Statutory Provision Article 2(5) of the Japanese Anti-Monopoly Act (hereinafter: “AMA”) prohibits the abuse of a superior bargaining position against a trading partner, as follows:

"(5) Taking any act specified in one of the following, unjustly in light of the normal business practices by making use of one’s superior bargaining position over the other party:

(a) Causing the said party in regular transactions (including a party with whom one intends to have regular transactions newly; the same shall apply in (b) below) to purchase goods or services other than the one pertaining to the said transactions;

(b) Causing the said party in regular transactions to provide for oneself money, services or other economic benefits;

(c) Refusing to receive goods pertaining to transactions from the said party, causing the said party to take back the goods pertaining to the transactions after receiving the said goods from the said party, delaying the payment of the transactions to the said party or reducing the amount of the said payment,

102 Hyundai Department Store, supra note 73, at § 2.C.(3)-(4).103 Id. at § 2.C.(4)104 This section is partly based on a relevant section in an article co-authored by one of the authors with Professor Masako Wakui of Osaka City University to be published in the Journal of Antitrust Enforcement.

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or otherwise establishing or changing trade terms or executing transactions in a way disadvantageous to the said party."105

Even though the scope of application of the provision is meant to be general, the provision has been more frequently applied to abuses of buyer power by large retailers against their suppliers. Meanwhile, the Korean provision has been applied more widely to distributors and subcontractors as well.

2. Elements of the Offense: Superior Bargaining Position

Market power is not a prerequisite for a superior bargaining position, which is generally understood to be relational power relative to a particular trading partner, as opposed to market power, which covers the entire relevant market. In fact, the relevant market, the definition of which is a prerequisite for finding market power, is generally not defined in Japanese abuse of superior bargaining position cases. There is little doubt that the defendant in some of the leading cases could not have had market power in the antitrust sense. In the Direx case, for example, the retailer was ranked fourth or fifth among discount sellers of groceries and clothes.106 In the Ralse case, the offender was the number three ranked grocery retailer in the Hokkaido prefecture.107 Market definition and market power assessment is similarly absent in the Marunaka and Toys “R” Us cases and in the Edion case.

The JFTC Guidelines state that a superior bargaining position is found “(i) where the supplier needs to continue transactions with the retailer, as discontinuing the transaction substantially impedes the supplier’s business and (ii) thus, the supplier finds it difficult to reject the retailer’s request, although it causes substantial disadvantage to the supplier”.108 This language is quite similar to the Korean approach to defining a superior bargaining position. The JFTC examines factors such as the supplier’s degree of dependence on the commercial relationship with the retailer at issue, the retailer’s position in the market, the possibility for the supplier to replace the trading partner, and other facts indicating the supplier’s need to continue transactions with the retailer.109 Again, these factors are quite similar to the factors that are considered by the KFTC. In Japan, the fact that the supplier is larger in company size than the retailer does not negate the possibility of the retailer’s superior bargaining position over the supplier.110 This is rather different from the situation in Korea, where the KFTC places some emphasis on the relative size of the two parties

105 Prior to the AMA amendment in 2009, the abuse of a superior bargaining position was specified in the Japan Fair Trade Commission’s (JFTC) General Designation in Point 14.106 Direx Corporation, JFTC Cease and desist order (hereinafter referred to as Direx) and Surcharge payment order, 5 June 2014.107 Ralse Company, JFTC Cease and desist order (hereinafter referred to as Ralse) and Surcharge payment order, 3 July 2013.108 The JFTC Guidelines Concerning Abuse of Superior Bargaining Position under the Antimonopoly Act, 30 November 30 2010 (hereinafter referred to as JFTC Guidelines), at § II-1.109 Id. at § II-2.110 Id. at § II-2.

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and has substantiated a finding of a superior bargaining position on the fact that the defendant was substantially larger than the contractual counterparty.111

In all five recent cases, the JFTC found that discontinuing trade with the retailer at issue would have substantially harmed the supplier’s business, which presumably indicates difficulty of substitution. Therefore, the supplier was compelled to accept the retailer’s disadvantageous request and the supplier had an inferior bargaining position relative to the retailer. Regarding difficulty of substitution, in all five cases, it was found that the supplier had difficulty securing the turnover that was equivalent to the one with the retailer at issue by beginning trade with other retailers or increasing the trading volume with incumbent retailers. In none of these cases was it noted to what extent the turnover would have decreased and how long the supplier would have suffered from it.112 Similar to the situation in Korea, the consideration of the degree of dependence and the difficulty of substitution can be adapted for the purposes of conglomerates. Assuming that the contractual counterparty transacts with multiple companies in the same conglomerate, what would need to be substituted is not the trading volume with an individual company, but with the entire conglomerate. Likewise, assessment of dependence should refer to the trading volume with the conglomerate rather than the individual company.

In the Edion, Ralse, and Direx cases, the JFTC noted that some of the aggrieved suppliers were selling large quantities of products to the retailers.113 According to the JFTC Guidelines, such a fact can demonstrate a supplier’s need to trade with a retailer.114 In the Edion and Marunaka cases, the JFTC referred to the increasing number of the retailer’s stores, while in the Direx and Ralse cases, the retailer’s turnover was increasing.115 According to the JFTC Guidelines, such facts can also demonstrate the supplier’s need to trade with the retailer.116 Lastly, the supplier’s hope to retain or increase its sales to the retailer was noted in the Marunaka and Toys “R” Us cases.117 This factor is problematic because it is unclear why a supplier’s subjective desire or expectation with respect to future business should affect the determination of a superior bargaining position. 111 See, e.g., the LG Electronics and the Korea Land and Housing Corp. cases112 Direx, supra note 102. One noteworthy observation is that conceptually, the degree of dependence and the difficulty in substitution may overlap to a great extent. Presumably a supplier only has a high degree of dependence if it can only obtain the requisite amount of turnover from a particular retailer. The two go hand in hand. One way to draw a clear distinction between the two concepts is when the degree of dependence only refers to the percentage of sales accounted by a particular retailer. In such instances, the difficulty in substitution is the next, distinct step in the analysis.113 Direx, supra note 102; Ralse, supra note 103; Edion Corporation, JFTC Cease and desist order (hereinafter referred to as Edion) and Surcharge payment order, 16 February 2012.114 JFTC Guidelines at §II 1(4). Note that the JFTC is not concerned about the proportion of a supplier’s sales accounted for by a retailer, but about absolute quantity. In a way, absolute quantity is much less indicative of a supplier’s need to trade with a retailer. Nonetheless, the current JFTC practice is to focus on absolute quantity. 115 Direx, supra note 102; Ralse, supra note 103; Sanyo-Marunaka, supra note 109; Edion, supra note 111.116 JFTC Guidelines at § II 1(4).117 Sanyo-Marunaka, supra note 109; Toys“R”Us-Japan, Ltd., JFTC Cease and desist order (hereinafter referred to as Toys“R”Us) and Surcharge payment order, 13 December 2011.

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3. “Unjustly”: Inhibition of Fair Competition

Infringement is found only when the practice is conducted ‘unjustly in light of the normal business practices’.118 In this context, ‘normal business practices’ imply those that are recognised as ‘normal’ in view of a fair competition system. However, it is important to note that this is a normative and not an empirical concept. Just because a practice is common in an industry does not mean that it constitutes normal business practices. The JFTC considers whether a particular practice should be deemed normal in light of the circumstances of the industry. In this sense, the JFTC seems to differ from the KFTC in that the KFTC has used on a number of occasions the fact that a particular conduct is not seen in an industry to substantiate a finding of injustice.119 The legislative history of the AMA suggests that the phrase ‘unjustly in light of the normal business practices’ was inserted to refer to ‘having the tendency to inhibit fair competition’ (Article 2(9)6).120 Although the concept of impediment of fair competition is open-ended, one definition that seems to have been accepted by the JFTC is that the tendency to inhibit fair competition is demonstrated when the retailer imposes on the suppliers either an unreasonably excessive disadvantage or one that is unexpected by the suppliers.121 The JFTC uses this concept in its guidelines to classify certain conduct as unjust. A retailer’s abusive practice can cause an unreasonable or unexpected disadvantage to the supplier in various ways. Unexpected disadvantage, which can be interpreted as referring to ex post revision of contract terms, indeed provides a fairly clear-cut and operationalizable concept for determining legality. Thus the factors that need to be taken into account in the evaluation will vary by the type of practice. The evaluative approach for typical abusive practices is explained below.

4. Practices Indicated under Article 2(9)5

A conduct must fall within one of the categories prescribed in Article 2(9)5(a) to (c) to be deemed a violation. For practices mentioned under Article 2(9)5(a) and (b), a continuous trading relationship is necessary to substantiate the violation. During the AMA legislative process, it was explained that without a continuous trading relationship, the cited practices, such as forced purchases and obtaining financial benefit from a trading partner, would not even take place to begin with. In contrast, one can imagine delayed payment and forced return of goods to take place even in 118 JFTC Guidelines at § III.119 Yet it is not clear whether this concept of empirical prevalence can only be used as a sword or whether it functions as a shield in Korea. While the rarity of a conduct may constitute a factor for finding injustice, it is not clear whether the prevalence of a conduct would exonerate it.120 Akira Negishi (ed), A Commentary on the Antimonopoly Law of Japan [Tyushaku Dokusenkinshi ho] (Yuhikaku 2009) 342-45 (Akira Negishi); Takaji Kanai et. al., Antimonopoly Act [Dokusenkinshi ho] (4th edn, Koubundou 2013) 260-63 (Noboru Kawahama); Noboru Kawahama et. al., The Basic Economic Law [Basic Keizai ho] (4th edn, Yuhikaku 2014) 174 (Fumio Sensui).121 Kanai et. al., supra note 118, at 357; Shuichi Sugahisa et. al., Antimonopoly Act [Dokusenkinshi ho] (Shojihomu 2013) 174; Tadashi Shiraishi, Lecture on Antimonopoly Act [Dokusenkinshi ho Kogi] (7th edn Yuhikaku 2014).

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one-time transactions. This requirement obviously makes sense as it would be difficult to argue that a supplier has any degree of dependency on a particular retailer if the supplier has only entered into one or a handful of transactions with the retailer. Only when a supplier is in a continuous trading relationship with the retailer can the supplier be said to depend on the retailer, unless the market conditions have significantly changed recently. Therefore, to the extent that Article 2(9)5)(c) is sought to be applied in the absence of a continuing trading relationship, there would be greater difficulty in establishing the relevant degree of dependence.122

5. Prevalence of the Practice

The AMA does not expressly impose a prevalence requirement. However, in all of the recent JFTC cases, the number of suppliers was large and the practices were conducted for a substantial period of time and often systematically.123 This is only understood to be a matter of the JFTC’s enforcement policy to target practices that have widespread impact.124 However, some may argue that the prevalence of the practice is required to substantiate an AMA violation, since fair competition cannot be impeded by a few isolated instances of abusive practice. One JFTC case appeared to support such a position.125 In some ways, the notion of prevalence highlights the tension between abuse of superior bargaining position on the one hand and general competition law on the other hand. A superior bargaining position refers to relational power between two contractual parties. In a sense the state of the rest of the market does not matter at all. However, if the rationale for regulating abuse of superior bargaining position is to prevent impediments to fair competition, it seems that one would necessarily need to examine the rest of the market. It makes little sense to speak of fair competition when one only refers to one relatively unimportant competitor in the market.

6. Compulsion by the Retailer Against the Supplier 122 As clearly written in the provisions, the continuous relationship does not have to be pre-existent. Mere intention to establish a continuous trading relationship suffices. This is clearly problematic as allowing this requirement to be met by a mere unilateral intention to enter into a continuous relationship effectively eviscerates the requirement. This watering down would have been less problematic if the intention is required to be mutual or bilateral, or if unilateral, at least reasonable. It would make a mockery of this requirement if it could be met by an unreasonable and unrealistic intention to enter into a continuous trading relationship on the part of one party, when the counterparty has never signalled any intention for the transaction to be more than one time. This is ultimately, however, not a significant issue as presumably the supplier will have a difficult time demonstrating dependency if the parties have only transacted once or a few times, despite the supplier’s subjective intent.123 The tendency already existed before 2010. For example, the monetary contributions collected by retailers amounted to JPY54 million in the Eco’s case and more than JPY500 million in the Valor case. Similarly, the number of employees dispatched was 13,500 in the Royal Home Centre case and 166,000 in the Yamada case. In re Royal Home Center Co., Ltd., JFTC Cease and Desist Order of 30 July 2010; In re Yamada Denki Co. Ltd., JFTC Cease and Desist Order of 30 June 2008; Eco's Co., Ltd., JFTC Cease and Desist Order of 23 June 2008; In re Valor Co. Ltd., JFTC Cease and Desist Order of 13 Oct 2006.124 Negishi, supra note 118, at 498-99; Kanai et. al., supra note 118, at 357.125 In re Fujitaya Co., Ltd., JFTC Hearing Decision, 28 February 1992. It was a tie-in case to which Article 19 (provision on unfair trade practices) was applied.

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Obviously, any conduct that is voluntarily performed by the supplier cannot be the basis for establishing an illegal abusive practice. In all five recent cases, the JFTC found that the suppliers were compelled to accede to the retailer’s request.126 Compulsion may be found if the supplier in fact did not have any option but to comply with the retailer’s request. The lack of option obviously cannot be taken literally. The supplier always has the option of saying no to the retailer and risks losing all the retailer’s business. Therefore, the real question is not whether the supplier has options, but whether the supplier can remain viable without the retailer’s business. This effectively refers back to the degree of dependency and the existence of a superior bargaining position. For instance, in the Ralse case, the retailer sent a letter of ‘request for help at our stores’ and asked if the supplier could send their employees to them. Despite the seemingly voluntary nature of the request, the JFTC nonetheless determined that the letter required such a dispatch.127 Compulsion obviously has to be one of the considerations in determining abuse of superior bargaining position. Again, one would imagine that it would be easier to establish compulsion if the contractual counterparty deals with multiple companies within a conglomerate. The impact of possible retaliation would be more vast. The KFTC has likewise focused on this factor. And similar to the JFTC, the KFTC does not insist a literal lack of options. In the KFTC’s analysis, one also observes the overlap between determination of compulsion and the existence of a superior bargaining position.

7. Abusive Practices and Their Unjust Nature7.A Forced Purchase or Usage

Article 2(9)5(a) is triggered when a supplier is forced to purchase or use goods or services that are distinct from the subject matter of the supply contract. The source of the good or service may be the contractual counterparty or a designated third party. Such forced purchase is considered unjust when it imposes a disadvantage on the trading partner by compelling the partner to buy products without justification.128 In contrast, it is considered legal to specify that a supplier use certain raw materials or production facilities in order to ensure product quality, even if this requirement is tantamount to a forced purchase.129 In practice, the majority of cases involving illegal, forced purchases relate to goods that have nothing to do with the subject matter of the original contract. In the Sanyo-Marunaka case,130 Sanyo-Marunaka, a retailer selling groceries and clothes, required suppliers to purchase Christmas goods from it. In the

126 The JFTC establishes compulsion by means of an information request order addressed to suppliers. When issuing the order, the JFTC gives multiple choices to the supplier: (1) the supplier had been notified by the retailer that the latter would retaliate, by way of terminating the trading relationship or reducing the trading volume or amount, if the supplier did not comply with the request; (2) the supplier had in fact experienced such retaliation in the past; or (3) the supplier had heard that it had happened to other suppliers or the supplier believed that the retailer might retaliate. See Nagasawa, supra note 108, at 63.127 Ralse, supra note 103.128 JFTC Guidelines at § IV 1(1).129 JFTC Guidelines at § IV 1(2).130 Sanyo-Marunaka, supra note 109.

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Ralse case,131 Ralse, a retailer of groceries and clothes in the Hokkaido area, required its suppliers to buy business suits from it and repeatedly pressed those that had not met the target to make further purchases. One may think that forced purchases as understood by the JFTC would be more likely to take place with a conglomerate company. Given the wide range of goods and services provided by a conglomerate, it would be in a better position to compel a counterparty to purchase from an affiliate a good or service that is unrelated to the original contract and benefit from the purchase.

7.B Procuring Money Unjustly from Suppliers (Forced Contribution of Expenses)

A retailer’s practice to extract financial benefit from its suppliers is prohibited under Article 2(9)5(b). This is commonly done under the guise of a “contribution fee” at the time of the retailer’s opening of a new or refurbished store. The JFTC Guidelines state that the contribution fee is unjust “when (i) the parties had not specified the contribution amount, the basis for its calculation, its purpose and so forth; thus, the contribution causes an unexpected disadvantage to the other party or (ii) the contribution causes the other party an unreasonable disadvantage in light of its direct advantage accruing to the other party [italicised by the author for emphasis]”.132 The disadvantage is unexpected if the extent of the burden or the method of calculation had not been agreed upon in advance. Even when the supplier was anticipating a certain type of burden to be imposed, the burden is considered unexpected if the conditions and terms of such an imposition were not made clear beforehand.133 Thus, in a way, this prohibition can be quite easily circumvented if the retailer stipulates all these fees and their calculation methodology in advance in the initial supply contract, so long as the fees do not impose an unreasonable advantage. Presumably given the superior bargaining power of the retailer, the supplier would have no alternative but to acquiesce to these demands.134

As far as unreasonable disadvantage is concerned, the key concept here seems to be whether the supplier obtains a direct advantage as opposed to an indirect disadvantage in return for the fees it incurs. The rationale seems to be that when a supplier incurs a fee, it either obtains nothing of value or some sort of advantage in return. In the former case the determination is easy. The disadvantage is clearly unreasonable, for the supplier has been asked to pay for nothing. In the latter case one would think that a weighing exercise is called for to see if the supplier obtains a net advantage or disadvantage, and if the latter, how substantial it is. Presumably when the fees clearly outweigh the advantage received, the conduct will be deemed unreasonable. However, one can imagine that this kind of exercise would be fraught with difficulty in

131 Ralse, supra note 103.132 JFTC Guidelines at § IV 2(1)A.133 JFTC Guidelines at § IV 2(1).134 In fact, the retailer need not even go through the trouble of stipulating all these contributions in the contract. The retailer can achieve the equivalent of contribution fees simply by bargaining for a lower contract price. It is unclear to what extent retailers will circumvent the prohibition of contribution fees and other monetary benefits by doing that.

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quantification. Therefore, to minimize instances in which this kind of weighing exercise is called for, the JFTC opted for a screening test based on the distinction between direct and indirect advantages. The former is given credit while the latter is not. If the supplier obtains a direct advantage, the net disadvantage is unlikely to be deemed unreasonable, unless the fees are clearly disproportionate to the advantage received.135 On the contrary, if the advantage is indirect, it will not be given credit and the net disadvantage will be deemed unreasonable. Examples of direct advantage include the increase in the supplier’s sales of the product when the supplier contributes towards the retailer’s advertising activities to promote the supplier’s product. In contrast, the retailer’s favourable treatment of the supplier in the future is deemed to be an indirect advantage.136

The following recent cases illustrate unlawful procurement of contribution. In the Sanyo-Marunaka, Ralse and Direx cases,137 the defendant requested contribution from its suppliers for various purposes such as promotion, financing of store opening sales and closing sales. In all these cases (except the Direx fire incident), the JFTC suggested that the advantage provided by the suppliers was not proportionate to the benefits they obtained.138

7. C Procuring Services Unjustly from Suppliers (Forced Dispatch of Employees)

A retailer’s practice of procuring service unjustly from its suppliers is prohibited under Article 2(9)5(b). Typically, the retailer requests the suppliers to send over their employees and engages them to work under its instruction. The work assigned to the employees may include replenishment and arrangement of goods at newly opened and refurbished stores, as well as customer services. This seems to be a rather uniquely Japanese phenomenon as the KFTC guidelines make no reference to forced dispatch of employees. The JFTC Guidelines state that the retailer’s request for the services of its suppliers’ employees is unjust “when (i) the party had not specified on what occasions and under what conditions such a request would be made, thus causing unexpected disadvantage to the other party, or (ii) the dispatch causes the other party unreasonable disadvantage in light of the direct advantage created from the dispatch [italics for emphasis]”.139 In contrast, according to the JFTC, it is considered lawful from the standpoint of both reasonableness and expectation when the request is made in compliance with preset terms and conditions, which need to ensure that the supplier obtains some tangible benefit from the offer of service. Such conditions include specifying the compensation to be paid to the suppliers and ensuring that they benefit 135 JFTC Guidelines at § IV 2(1)A136 JFTC Guidelines at Note 9. 137 Sanyo-Marunaka, supra note 109.138 More specifically, the JFTC found that the suppliers gained no advantage, in terms of promoting their products, or less advantage, relative to the burden imposed on the suppliers in the Sanyo-Marunaka and Direx cases. In the Ralse case, the JFTC noted that Ralse made the request without considering any advantage that the suppliers would obtain through product promotion. The JFTC also pointed out that Ralse and Direx (store closing sales) did not clearly inform their suppliers beforehand about the purpose of and the basis for the calculation of contribution fees.139 JFTC Guidelines at § IV 2(2)A.

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from the dispatch. For example, a supplier can utilise its knowledge of its own products and promote them or be given the chance to learn about customers’ needs.140 The disadvantage is unexpected if the conditions had not been clarified in advance. In assessing whether or not the disadvantage is unreasonable, the allocation of the cost for the dispatch is relevant. In all the recent cases, the retailers bore no or little cost. The assessment is typically made with reference to substance over form. Mere pretenses to make payment to the supplier will not suffice. In the Ralse case, Ralse handed over an invoice to its suppliers for intended future payments. Nonetheless, the JFTC found that Ralse incurred minimal cost, since the suppliers would find it difficult to request the payment. Indeed, it was not made in most cases.141

Recent cases of forced dispatch of employees include the Edion, Sanyo-Marunaka, Ralse, and Direx cases. In all four cases, the suppliers dispatched their employees without any terms and conditions being agreed upon in advance. The retailers also incurred no or minimal cost. In three of the four (Sanyo-Marunaka, Ralse, and Direx) cases, the JFTC noted that the dispatched employees shelved products that were not supplied by their respective employers. Although opening new and refurbished stores might result in increased demand for the suppliers’ products, it is uncertain whether this benefit would justify the burden borne by the suppliers.

7.D Late Payment, Retrospective Discounts, and Return of Goods

Article 2(9)5(c) typically deals with situations where the obligation is not performed as agreed, such as late payment and retrospective discounts, which under Korean law would fall under the rubric of imposition of disadvantages. Article 2(9)5(c) applies not only to breach of contract, but also to its retrospective amendment. For example, if the retailer requires suppliers to postpone its payment date, the retailer’s practice itself to impose such a retrospective change can constitute a violation.142 Often, the provision applies to retrospective discounts and return of goods. This only makes sense because given the retailer’s superior bargaining position, the supplier probably cannot resist the retailer’s demand to amend the contract retrospectively. Applying this prohibition only to a breach of contract scenario would thus create a gaping loophole. Recently, the JFTC found the following violations.

In the Toys “R” Us–Japan case,143 Toys “R” Us imposed retrospective discounts for the goods that it had sold at discounted prices. The discounted goods were unsalable inventory, unsold seasonal goods, etc. The JFTC specifically noted that the returns were made without the suppliers’ request and did not result in any direct advantage to them. In the Sanyo-Marunaka case,144 Sanyo-Marunaka imposed retrospective discounts for the goods that it had sold at discounted prices. Sanyo-Marunaka also returned to the suppliers food products that had not been sold by the cut-off date it had 140 JFTC Guidelines at § IV 2(2)B.141 Id.142 JFTC Guidelines at § IV 3(3)A.143 Toys “R” Us, supra note 115.144 Sanyo-Marunaka, supra note 109.

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set unilaterally. In both cases, the JFTC noted no justifiable reason to hold the suppliers accountable for the discounts and the returned goods. Furthermore, the JFTC pointed out that the retailers and the suppliers had not agreed in advance on the conditions for returning unsold goods and that the retailers did not compensate the suppliers for their losses.

Chapter V: Conclusions: Do Superior Bargaining Position Prohibitions Provide a (Partial) Efficient Solution for Aggregate Concentration?

The empirical study of the two main jurisdictions which apply the prohibition against abuse of superior bargaining position, elaborated above, raises the following question: do superior bargaining position prohibitions provide a (partial) efficient solution for aggregate concentration. A full-blown cost-benefit analysis should compare this regulatory tool to other regulatory alternatives. Furthermore, the tool’s welfare effects require a decision-theoretic analysis which takes into account not only the substance of the provision, but also the practical institutional capabilities of the decision-maker in light of the information required in order to apply the regulation.145 While such an analysis is beyond the scope of this chapter, we suggested several observations.

The tool of abuse of superior bargaining position is an indirect tool for dealing with aggregate concentration. It does not deal with the root of the problem- the high levels of aggregate concentration, for example through structural separation or by taxing pyramidal structures. 146 Rather, it deals, partially, with the effects of such high levels of concentration. Therefore, where aggregate concentration is not justified by social welfare considerations (e.g. providing a solution to the problem of lack of institutions), a prohibition of superior bargaining position is, at most, a second-best tool. Yet it might be that the political economy forces that protect and assist the creation of high level of aggregate concentration, also prevent a jurisdiction from applying structural first-best solutions. Should this be true, then the benefits of such an otherwise second-best tool are increased.

There might, however, be another explanation for applying the abuse of superior bargaining power prohibition to deal with aggregate concentration. Some jurisdictions, including South Korea, have attempted to tackle the root cause of aggregate concentration by imposing very detailed prescriptive rules in its competition law on the scope and ownership of conglomerates and prohibition of cross-subsidy between affiliates within the same conglomerate.147 South Korea has also adopted rules that restrict the cross-ownership between financial and non-

145 Isaac Ehrlich & Richard A. Posner, "An Economic Analysis of Legal Rulemaking," 3 STUD. L. J. 257 (1974); C. Frederick Beckner & Steven C. Salop, "Decision Theory and Antitrust Rules," 67 ANTITRUST L.J. 41 (1999).146 For a tax tool see, e.g., Randall Morck, How to Eliminate Pyramidal Business Groups: The Double Taxation of Intercorporate Dividends and other Incisive Uses of Tax Policy, 19 NAT'L BUREAU OF ECON. RES. 135 (2005). In Israel a new legislation was adopted which seeks to create a degree of ownership separation between financial and productive institutions and limit the levels of control in a business pyramid.147 MRFTA, at Arts. 8-2, 9, 10, 11-2.

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financial companies to prevent the kind of control of access to finance that was described earlier as one of the harms of aggregate concentration.148 However, the effectiveness of these rules has been questioned as conglomerates have continued to prosper and dominate the Korean economy. Where it is acknowledged that breaking up aggregate concentration is difficult or unwarranted, perhaps aggregate concentration should be treated, similar to dominance, in such a way that acquisition and possession of aggregate economic power is permissible, only its abuse is not. If that is the realization that one has come to with regard to one’s own jurisdiction, then it is imperative for competition law to refine abuse of superior bargaining position as a tool for tackling aggregate concentration and to identify other forms of manifestation of aggregate economic power and propose tools to tackle them.

Indeed, the abuse of superior bargaining prohibition is the most readily available tool one has within the arsenal of general competition law to tackle economic power that is not confined to a particular market, or market power in the conventional sense. Yet this, by itself, is not sufficient reason to apply it. A deeper analysis is needed.

On its face, the prohibition of superior bargaining position is wide and vague, thereby not creating much certainty with regard to its scope, in particular whether it captures the intricacies of aggregate concentration on welfare and competition. Yet it might be that this fact enabled its adoption in the first place, because not all those that were eventually affected were aware of its potentially wide interpretation and application. In other words, the prohibition’s wide scope and vagueness served to open the door for its use to tackle issues of aggregate concentration that could otherwise not be reached through competition law. Indeed, as the above overview indicates, the regulation of abuse of superior bargaining position was arguably not directly intended to tackle the accumulation of economic power from aggregate concentration. Especially in Japan, it has been mainly used to deal with buyer power of large retailers, regardless of aggregate concentration. However, in Korea, it has been used against large conglomerates, even though the doctrine itself was not specifically tailored to conglomerates. The ability to limit economic power through the prohibition, however, might be a one-time effect, since the more jurisdictions use it in such a way, the more those that enjoy regulatory capture in other economies would be aware of its potential.

Despite the fact that it was not specifically intended to deal with economic power resulting from aggregate concentration, some of the requirements of the prohibition apply more readily to conglomerates. For example, under Japanese law the factors of degree of dependence and difficulty of substitution would be more easily established for conglomerate companies if the analysis takes into account the entire conglomerate as opposed to individual companies. Under Korean law, the general requirement that the defendant can exert a significant influence on the counterparty’s business and the specific factors of the markets in which the defendant operates and the difference in business capacities and scope of business would similarly also be easier for a 148 MRFTA, at Arts. 8-2, 11.

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conglomerate company to fulfill because, by definition, conglomerates operate in multiple markets and are generally larger than individual single-market companies. By virtue of these two factors, a conglomerate is also more likely to exert significant influence over the counterparty’s business operations. There are also reasons to argue that certain types of abuses may be more likely to be found among conglomerate companies. Most of these abuses entail the use of a superior bargaining position in one market to extract benefit from another market, such as forced purchase and forced provision of benefit. The imposition of sales target may also be common among conglomerates in Korea given that many of the conglomerates in that country are producers and the small businesses tend to be distributors of goods and services. In particular, in the case of the forced provision of benefit, the KFTC Guidelines specifically mentioned the possibility of leveraging the superior bargaining position of an affiliate to extract a benefit. The affiliate is mostly likely going to operate in a different market. And in the case of forced purchase, there is likely to be a similar leveraging of a superior bargaining position because forced purchase very often involves purchase of an unrelated product in a different market. Both types of abuse essentially involve reciprocal dealing and the leveraging of a superior bargaining position in a different market to extract benefit. Given that conglomerates are more likely to operate in multiple markets, it goes without saying that it has greater scope to impose such kind of “leveraging” abuses.

It is possible to refashion the prohibition in such a way that it could be better tailored for application to conglomerates. One obvious change is to take into account, as in the Korean Lotte.com case, whether the defendant is part of a conglomerate to determine whether there is a superior bargaining position. In fact, given that the KFTC takes into account the difference in size between the defendant and the counterparty, and conglomerates are by definition very large in size, it seems that a presumption of a superior bargaining position exists for a conglomerate company if the defendant is identified as the conglomerate as a whole. This presumption can be rebutted by contrary evidence. Alternatively, it is possible for the prohibition to take into account the multi-market contact between the defendant and its counterparty. To the extent that the defendant and the counterparty trade in multiple markets, there is reason for the counterparty to believe that possible retaliatory action by the defendant will not be confined to one market, should the counterparty refuse to accede to the defendant’s demand. In other words, the defendant’s bargaining power is aggregated across multiple markets. To broaden the scope further, if the counterparty deals with the defendant in one market and the defendant’s affiliate in another market, it may also be appropriate to take into account the bargaining power of the defendant and its affiliate, for they are likely to act in concert in reacting to the counterparty’s response to the defendant’s demand. In fact, one can broaden the scope yet further and take into account the counterparty’s affiliate’s trading relationship with the defendant’s affiliate. To the extent that the counterparty has an affiliate that trades with the defendant’s affiliate, the counterparty’s affiliate may be affected by the counterparty’s decision in reaction to the defendant’s demand. The general idea is that when dealing

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with a conglomerate company as a defendant in an abuse of superior bargaining position case, one should treat the conglomerate rather than the defendant itself as the relevant economic entity.

However, before widening the scope of this regulatory tool, it is imperative to acknowledge and deal with its potential costs. Most importantly, the prohibition’s wide scope might chill welfare-enhancing competitive behaviour. Practical application of the prohibition will determine the size of this cost. Here we suggest that three main cumulative parameters should be applied. The first is whether the conduct is exploitative or exclusionary. An exclusionary conduct creates a stronger justification for intervention since it puts a spoke in the wheels of competition. Indeed, most of the instances which come under the prohibition in Korea and Japan have the potential to create exclusionary effects, and many resemble known offenses such as tying and imposing unfair trading conditions. The second parameter is whether the conduct was predictable or known ex ante. If it was known ex ante, the contracting party might have been able to prepare, maybe be contracting with another party. Also, the conglomerate, acknowledging this, might take steps to ensure its counterparts that it will not change conditions retroactively. The third parameter is whether the superior bargaining power results from legitimate competition on the merits, or whether it was a result of other forces such as political economy influences. If the latter is true, then there is a stronger basis for regulation, even if the conduct does not harm competition. The cost analysis should take into account the ability of decision-makers to actually evaluate such parameters correctly ex ante. Only if the benefits of the prohibition are larger than its costs, should it be applied to regulate aggregate concentration.

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