Keeping the market principle intact

I looked through news articles to check if there had been any cases of companies disclosing the breakdown of costs in their final products and services in a market economy. I finally found one.

It started with one local big-box retailer selling ready-to-serve fried chicken at 5,000 won ($4.72). Mom-and-pop fried chicken stores revealed the cost of their menu in order to prove that they don’t pocket a 9,000 won profit by selling a full chicken at an average of 14,000 won.

They disclosed the wholesale price of the chicken, oil, packaging, drinks and (free) sauce. Consumers went abuzz upon reading the price list. Some were appalled that shops changed the frying oil just once every five to six days. Others pushed further to demand the disclosure of the cost of imported foreign wine brands and jeans, as well as the production of laptops and mobile phones.

Let’s assume a fried-chicken shop owner discloses basic produce costs every year. Would consumers in the area come to a consensus on a reasonable rate the shop should charge for a meal? Would the reasonable rate have any impact on how many times the shop owner changes the oil to fry the chickens? How long would it take the consumers and the shop owner to come to an agreement on the final price? Would the fried-chicken shop owner ever get a new bank loan after he revealed how unprofitable he was in business? If I was the shop owner, I would more or less have to shut down the business. Cost disclosure conflicts with how the market economy works.

The crux of the controversy over disclosing the basic rate wireless carriers charge on individual phone packages is no different than the case with fried-chicken shops. But we cannot simply protest the disclosure based on the same argument. Wireless network carriers offer services to 52 million units across nationwide, not a small group of chicken lovers in a town. Small businesses fight for market dominance, but a service that the entire population uses is a matter of public function.

Wireless telecommunications services were privatized in 1994 and since then have been open for private competition. We need not cite Adam Smith, guru of modern economics, to reason that the market moves on profit-making dynamics. All businesses aspire to attain predominance in the market. The wireless sector is a strategic industry that must invest enormously in technological innovation in order to survive and get ahead. If companies are forced to disclose how they set rates to make money, no one would be able to continue their business.

Adam Smith also said the market cannot run entirely on the pursuit of individual profit and warned against the temptation and danger of monopolies and collaboration. Businesses should be allowed to compete to become market leaders, but once they have achieved their goal they must be restrained so they don’t abuse their market status to amass profit. But disclosing basic rates could dampen enterprise aspirations and make it hard for anti-trust authorities to restrain them through regulations.

If disclosing costs can help unfair business practices, other free market societies would have enforced it. If something loses its functional role in the market, the reason for the failure should be studied and it should be removed. But rate disclosure would only generate other fallouts and failures.

The public role of wireless services alone cannot justify the argument to make businesses disclose basic price levels. Even public services must be based on the rule of supply and demand in a market system. The extra cost from public services should be separately subsidized through general accounting or contained through minimum interference in price setting. It in no way demands the necessity to disclose the basic cost.

The market economy should be carefully balanced to encourage profit seeking and restrain oligopolist practices. Disclosure of the breakdown of costs does not fit anywhere. Wireless services also should not be made an exception.

Translation by the Korea JoongAng Daily staff.

*The author is a business administration professor at Kookmin University.

By Lee Tae-hee