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[Editorial] Penalty-free cartels

FTC should have reprimanded duty-free shops

The antitrust regulator has just issued a kind of verbal warning to the nation’s eight major duty-free operators for cartel behavior, without handing down any fines.

The duty-free shops were found to have engaged in price-fixing by setting irregular foreign exchange rates for 63 months from 2008 to 2012. The players are Shilla, Walkerhill, Dongwha, the Korea Tourism Organization and four Lotte affiliates.

Given that the Fair Trade Commission looked into the case for about four years, it is not satisfactory that none of the eight rule-violators have been slapped with fines. Furthermore, the FTC’s decision on Wednesday is irresponsible, especially when considering its earlier remarks that heralded tough sanctions.

In early April, an FTC official said that the probe committee had reached the conclusion that the shops had manipulated currency exchange rates for the purpose of price-fixing.

But a month after the official’s announcement, FTC officials said in a news briefing that the committee has “finally judged that their irregular gains (from the cartel) were negligible overall.”

They cited discounts offered by the shops as the main factor that had blocked huge irregular gains, adding that the shops, despite the price-fixing, were sometimes placed in an unfavorable position due to foreign exchange fluctuations.

Based on the FTC’s logic, any cartel practice in the nation would be tolerable as long as the colluding firms do not gain much from it. And future cartels would be forgiven as long as they provide consumers with benefits like discount services after initially taking underhand profits. The authority has left a poor precedent for an issue which might need to be tackled in other industrial sectors in the coming years.

Some consumers, including inbound tourists, might purchase goods at higher prices compared to those legitimately set by real exchange rates, while others might not enjoy the discounts.

It is practically impossible for the FTC to instruct duty-free shops to pay back their irregular gains to buyers of goods. However, the regulator has the public obligation to levy fines to a reasonable extent. If not, there is no reason for consumers to pay taxes for the authorities to carry out antitrust oversight activities.

According to the commission, the eight operators argued that they applied their own exchange rates because of day-to-day exchange rate fluctuations that affected prices, which are too much of an inconvenience for them and their consumers.

If this is the case, the shops should have notified all of their customers of the difference between their own rates and the market rates.

The difference between 1,190 won and 1,200 won per U.S. dollar would result in a 10,000 won price difference for a handbag with a price tag of $1,000.

Should 1,000 consumers pay Korean banknotes for the bag at one duty-free operator, the seller would have the benefit of making 10 million won more from the cheaper local currency of 1,200. And the eight players could see a collective profit of 80 million won from such price-fixing practices.

South Korea is the world’s largest duty-free market, and it often enjoys mass purchases by a great number of Chinese tourists, with sales growth rapidly increasing over the past few years.

If the price-fixing practice continues, some visitors might think they are being duped by local shops, which could affect the reputation of the nation’s overall retail and tourism sector as well as duty-free businesses.
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