[Viewpoint]Revise outdated law

The government is said to be planning to revise the Fair Trade Act to strengthen regulations against price manipulation.
The intention is apparently designed to fix the discrepancy between the fair trade laws and their implementation guidelines, which regulate only unfair price fluctuations by businesses, whereas the new law would prohibit all unfair price-fixing and fluctuations.
If the law is revised as planned, the Fair Trade Commission will set up legal grounds to intervene in the process by which businesses decide the prices of various products. Naturally, businesses are opposed to the government’s plan, calling it an attempt to regulate prices. Not only businesses, but also economic scholars, do not want the market principles of competition distorted by price regulations.
To begin with, price is the most effective factor that determines productivity. People ordinarily think that high prices are the result of the greed of businesses. But prices actually go up when people are willing to buy products at those higher prices. However hard one may wish to sell a product at a very expensive price, the price will plummet if no one buys it.
The reason a product that costs only 10 won ($0.01) to manufacture is sold at 10,000 won is not because the manufacturer has raised the price by a whim. It is because there are people who will buy it at that price. Of course, the manufacturer will make big money because many people want to buy it despite the high price.
When other businesses see such brisk sales , they will not just watch idly. They will jump into the business competitively and, as a consequence, supply will increase. When demand for a product increases, the price goes up. When the price goes up, businesses will increase production. The price leads the businesses to produce more of the product that people want. When the supply increases, however, the price will go down, to probably as low as 12 won.
However, if the fair trade watchdog intervenes in the market and tries to regulate the price of the product, sets it at 12 won, saying it is not fair to sell it at 10,000 won because its production cost is only 10 won, what will happen? Because there are a lot of people who want to buy it at the price of 10,000 won, a lot more people will rush to the market to buy the product if it is sold at 12 won. But businesses will then avoid manufacturing the product, and turn to other product lines that promise higher profits. Although the demand will skyrocket, the supply will not increase. Those who were lucky enough to buy one at the price of 12 won can sell it for 10,000 won on the black market. Price regulations keep businesses from supplying products that consumers want. It does not contribute to competition, but leads the market to confusion.
The price watchdog says it will limit the application of price regulations to non-competitive sectors. But to fan competition in the market, what is needed is not price regulation, but the creation of an environment conducive to competition by eradicating obstacles. Price regulation is a temporary expedient that is only necessary until competition is stimulated naturally in the markets.
When a temporary measure is provided, the urgent need to disband regulations to induce competition is often forgotten by policymakers.
We can understand the effort to sort out the administrative difficulties arising from the discrepancy in the law and its implementation rules. But the problem is that the temporary expedient introduced to get the guidelines in line with the law tends to be perpetuated, while the introduction of a vital system of market competition is delayed from day to day.
The source of the problem is the law that stipulates regulations on monopolies and fair trade practices. In 1980, when the law was enacted, the problems were the monopoly and oligopoly of the market by business conglomerates. At that time, big businesses that received enormous financial benefits from the government consolidated their monopolistic status in the domestic market and put it under their control. At that time, it was necessary to put monopolistic businesses under government surveillance.
For more than 30 years since, the whole world has experienced enormous changes brought by technological innovation and globalization. In advanced economies, governments promote a thorough social reform, changing the whole social structure to strengthen the competitiveness of their domestic businesses. We must change ourselves according to the needs of the time. Our priority task is securing Korea’s competitiveness in the world market. Now issues regarding business conglomerates are no longer their monopolistic hold on the domestic market. When we were beset by problems related to business conglomerates in the past, the market principle of free competition was often distorted. We must allow our businesses to arm themselves with the capability to compete in the international market by making a forceful revision of the fair trade law. We should not distort the principle of market competition by revising the implementation rule in line with the provisions of an out-date fair trade law.

*The writer is a professor of economics at Seoul National University. Translation by the JoongAng Daily staff.

by Lee Seung-hoon