Deregulation is the answer

A new law designed to reduce competition over subsidies among mobile carriers and bring about lower phone charges through more transparency in pricing has been heavily challenged since it took effect in the beginning of October. The Mobile Device Distribution Improvement Act aims to eradicate uneven prices in mobile phones, but consumers complain that they end up paying more for their phones. Some analysts point out that the regulation undermines free competition in the mobile phone market, while others argue it is too early to determine the impact of the law.

The problems with the new mobile phone law were predicted in advance. The law is a typical use of the type of invisible hand that simply does not deserve to exist in the 21st-century context. The regulation originated from ignorance of a market economy’s principles and the nuts and bolts of the telecommunications market. Policymakers believed consumers were spending beyond their means on luxury smartphones, duped into believing they were buying new phones at bargain prices and prey to the cunning marketing strategies of mobile phone carriers. They drew up the law to rein in corporate subsidies to customers purchasing high-end handsets and using expensive service rates.

To argue that Koreans are excessive spenders because the share of the phone bill in monthly household spending is the world’s highest or that they replace their phone too often is like telling them to change their diets because their spending on rice, soju and pork takes up too much of the monthly budget. Should the government regulate the sales of rice, soju and pork?

No other country enjoys an Internet and wireless environment like ours. Wi-Fi is accessible for free almost anywhere in the country and people can watch terrestrial TV programs for free. There are only a few places where so many self-employed business owners, call-service drivers and delivery men rely on mobile phones for their businesses.

In economics, consumers spend money on a product if they deem its value to them matters more than its price. The value of a commodity could be different for each person. Yet the government and the Korea Communications Commission seem to believe they know what’s best for consumers - all consumers.

Manufacturers and service operators must compete and market prices naturally change as a result of their competition. Koreans on average change their smartphones every year. Suppliers boosting subsidies to bring down old phones’ prices before they release new models is like selling products for half the price before the shop’s closing time. It’s all part of a perfectly common “loss leader” marketing strategy where goods or services are advertised or sold at below-cost prices to stimulate sales of more profitable goods or services. The top 20 percent of customers using high-end services and products account for 80 percent of revenue for mobile carriers. So they are merely trying to do their business - making profits - through ordinary marketing strategies.

The law uses several constraints to ensure fairness in pricing. First, wireless carriers are forced to disclose their subsidy amounts per handset and service charge discount rates to keep price fluctuations to a minimum. Because competitors are now aware of how much everyone charges, they cannot cut prices too much in order to steal away customers. Second, operators must offer the same discount rate regardless of what services their customers use and also offer the same discount rates on handsets to customer who renew their contracts that are offered to new customers. As a result, Korean consumers will have to pay 2.5 times more for the same phone than Americans and 1.6 times more than before the law went to effect. The country is a powerhouse in smartphone and wireless technology, and yet the government is more or less killing the market by forcing consumers to turn to used and out-of-fashion handsets.

A law that forces companies to collaborate on and fix prices should only exist in state-controlled economies. Such government heavy-handiness is ridiculous in a free market economy.

Consumers are now stripped of their choice and manufactures might lose the motivation to introduce new models in the domestic market because they no longer have competitive leverage. Sales outlets are complaining because of losses, and some may have to shut down. Who would trust a government that comes up with outdated and excessive regulations in the midst of a crusade against deregulation? The authorities must admit to their policy flop and undo the harm before it wrecks the market.

Translation by the Korea JoongAng Daily staff

*The author is a professor of the Kaist College of Business.

BY Lee Byung-tae