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For Whom the Cartel Conspires
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[0호] 승인 2005.07.07  
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Recently, there have been scenes of staff and customers in fast-food stores disputing over beverages. People automatically hold out an empty cup, but receive only a cold response.

This has happened owing to the discontinuance of free refill-services from October 1st: McDonald’s and Lotteria stopped supplying of this service, and KFC replaced it with slightly increased cups’ size.

Domestic and overseas fast-food businesses, such as Lotteria, McDonald’s, Burger King, and KFC, had operated the drink-refill service from 1999. However, on account of rising production and staff costs, the whole industry interrupted refills on beverages at the same time, as if through mutual agreement. So buyers are discontented with this stingy action.

One industry representative said, “The cost of one drink is insignificant, but if one person repeatedly tries to refill, it will cause losses. And staff’s workload has grown, especially in busy periods, owing to the need to provide refills.” This management approach, however, is tantamount to ignoring customers’ right to a service. These companies regard their vision as providing best service to customers.

There was a recent report that a minority people brandishing fast-food cups (so-called yamchejok or shameless persons’ group) go into stores and request a refill. However, it is only an extremely small number of people. Most people buy a set menu consisting of burgers, cokes, and french fries, and therefore the refill of drinks does not have tremendous impact on sales.

A book “Fast Food Nation,” described the fast-food business critically, shows that the production cost of a medium coke, which is sold for $1.29, is just nine cents and a $1.49 large coke costs a mere three cents more to make than a medium one. To be sure, Korea’s situation is different from that of the US.

Nevertheless, coke is sold at more than ten times cost price in Korea, too. These recent measures seem to be aimed at making up for losses resulting from excessive competition between fast-food chains.

The fast-food industry has held a variety of promotional events: McDonald’s sold burgers for 500 won and Lotteria did shrimp or chicken burgers for 1,200 won. This inordinate competition increases company losses, so it is unreasonable to claim that refill service is an ultimate factor behind companies being in the red.

The cartel means a combination of independent business organizations formed to regulate production, pricing, and marketing of goods by the members. This is not only a recent phenomenon.

It has existed from ancient times. Around 3000 B.C., Egyptian merchants formed a price cartel for wool. In the late Roman empire, a law was enacted to stop tradesmen from increasing prices or forming an artificial price monop-oly. Facts like this indicate that cartels were prevalent at that time.

In medieval Europe, this kind of collusion appeared in the form of guilds.

The guilds were associations of people involved in the same trade or crafts, and at that time nobody could run a particular craft or trade business without being a member of a guild. At the same time, they were restricted by guild rules regarding market price and business practices. In this way, cartels have subsisted from the past until now.

In Korea, also, we can find traces of this kind of collusion in the dojung (associations) of sigeons (merchants) in the middle of the Chosun dynasty. In addition, there were inter-gaekju (inns for merchants) in the late-eighteenth century. In this way, behaviors, similar to those of current cartels, had already begun to be common by the end of sixteen century.

If so, what benefits can be obtained by forming a cartel? To begin with, J. Schumpeter, an American economist, maintains that collusion plays a role similar to the brakes of an automobile. That is, in volatile economic conditions, by limiting competition cartel perform a valuable function of reducing investment risks. As well, this device can stimulate long-term economic growth.

D. T. Armentano, an US economist, states that collusion elevates economic efficiency as well. Namely, a cartel, which is formed voluntarily in the free market, according to the participants’ judgement, has more advantages than disadvantages. So, it can improve efficiency with respect to the whole economy.

This collusion, however, has more disadvantages than advantages. First of all, the most serious problem is that cartels totally eliminate competition. As a result, cartel participators acquire market-governing power as a monopoly. This also sets up a monopoly over prices and controls production and sales. In other words, the absence of competition means the absence of the most fundamental principles of a free market. Therefore, the free market does not work normally.

Secondly, if competition is removed, all sorts of resources - natural resources, manpower, land and capital - are not used efficiently. This will bring about the waste of resources in one field, and resource shortages in other field. Thirdly, this situation transfers profits from consumers to cartel participants. The consuming public purchase the commodities by paying high prices set by the cartel.

Fourthly, creative technical development, quality improvement efforts to rationalize management will fade away. While inefficient enterprises avoid bankruptcy and survive, highly motivated corporations lose their incentive. Lastly, cartel members attempt to hinder or expel non-cartel members from the market. Indeed, this can result in ‘Bad money drivies out good’.

Because of these bad characteristics, there are international efforts to restrict cartel activity. The Cabinet Council of the OECD adopted a ‘Recommendation of the Council concerning Effective Action against Hard Core Cartels’ on April 18th, 1998. With this move, they initiated efforts to regulate each nation’s hard core cartel activity, namely, mutual agreements or conventions for price fixing, conferences on bidding, production limitation and market division between competing industries. Korean law also prohibits cartels as unfair collaboration.

In the past, improper collaboration was defined according to ‘the rule of reason’ as the limiting of competition in certain areas of trade, and was punished after the fact. But since 1999, cartel activity has been defined as ¡®illegal per se,’ so that even just making an agreement to limit competition unfairly is now against the law.

In conclusion, industry have to recognize the negative side effects of cartel activity and endeavor to make profits through independent and fair competition rather than through cartel activity.
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