This blog post examines whether price competition enhances consumer welfare or breeds collusion and unfair practices, exploring the perspectives of businesses, workers, and the market through the case of Dangdang Chicken.
Competition and Corporate Choice
This blog post examines topics related to corporate choice. First, we explore the meaning of competition and monopolistic markets. In modern capitalist societies, monopolies are inextricably linked to competition, making understanding monopolies essential for grasping the modern economy. Next, we consider how to view corporate overseas investment and also examine incentives and sunk costs. Incentives and sunk costs are closely linked to organizational management issues within firms and the cost analysis of those considering entrepreneurship and investment. They also provide valuable information for individuals facing important economic decisions, helping them make better choices.
Is Dangdang Chicken’s Strategy Truly Dangdang?
In July 2022 in South Korea, the large supermarket chain Homeplus launched a new chicken brand called Dangdang Chicken. Priced at around 7,000 won, it was extremely affordable, prompting strong criticism from the existing franchise chicken industry, which labeled it as corporate bullying. The controversy surrounding Dangdang Chicken highlights the need to examine the meaning of competition in the economy from a variety of perspectives.
Fair Competition and Unfair Competition
Who truly benefited and who suffered losses with Dangdang Chicken’s arrival? Consumers clearly benefit first. When diverse products emerge to satisfy varied consumer tastes, or when low-priced items launch enabling consumers to reduce spending, consumers undoubtedly gain. Though limited sales constrained Dangdang Chicken, its low price likely satisfied a significant number of consumers who purchased it.
When new products emerge and the competitive landscape shifts, changes in profits and losses can have a significant impact, even determining a company’s survival. However, the effects on countless consumers during this process must always be considered. While the monetary impact on an individual consumer might be small, the total sum of benefits and inconveniences experienced by consumers can become substantial due to the sheer number of affected individuals.
What about the perspective of competition between companies? Companies that successfully establish new products in the market will benefit. Conversely, other companies competing with them face a higher probability of losing customers and incurring losses. Generally, in a market economy, competition between companies serves as a crucial driving force, compelling them to produce better goods. Companies grow by competing and checking each other.
However, problems arise when competition occurs unfairly. Unfair competition undermines fair economic order, so governments impose sanctions on actions like abusing monopolistic power or selling below cost to exclude competitors. Particularly, if unfair competition results in a specific company monopolizing the market, the damage ultimately falls squarely on consumers.
However, as competition between companies intensifies, it can sometimes lead to lower product prices or various benefits for consumers. Competition is fundamentally a process where companies strive to attract consumers to their side. Therefore, even if there is potential for unfair competition in this process, it can still provide short-term benefits to consumers.
At this point, if policies excessively suppress competition itself, there is a risk of causing the adverse effect of collusion between companies. When collusion occurs, product prices tend to remain high, ultimately causing consumers harm comparable to that experienced under monopoly conditions. A prime example is the ‘Act on the Improvement of the Distribution Structure of Mobile Communication Terminal Devices’, commonly known as the Mobile Terminal Distribution Act. While enacted to prevent cutthroat competition, this law has faced criticism for effectively cementing a structure where mobile carriers maintain high terminal prices over the long term.
Thus, even regulations intended to prevent unfair competition are never simple to implement appropriately. Ultimately, the core issue lies in how to define the standard for ‘unfairness’. Despite the existence of various legal mechanisms, including the Fair Trade Act, the reality of repeated fierce battles over legal interpretation clearly demonstrates how complex this problem is.
Dangdang Chicken’s inherent advantage
If Dangdang Chicken sold at Homeplus is priced below cost, it could be considered a loss leader. If the strategy involves luring consumers with low prices and then encouraging them to purchase other items while waiting for Dangdang Chicken, it could constitute unfair competition. However, Homeplus has consistently explained that its structure allows for profit even when selling Dangdang Chicken. Based on this claim, it is difficult to view Dangdang Chicken as a loss leader. Homeplus stated it reduced costs through mass production and bulk purchasing of raw materials. Companies striving to lower their own production costs is a positive factor for consumers. However, in the case of Dangdang Chicken, peculiarities emerge in the cost structure itself, beyond simply reducing expenses.
First, rent and labor costs are virtually absent from Dangdang Chicken’s cost structure. Typical franchise chicken outlets are independently operated stores, requiring building rent and necessitating the owner’s labor or additional staff costs. In contrast, large supermarkets utilize existing store space, eliminating separate rent expenses. Furthermore, since existing supermarket staff prepare and sell the chicken, no additional labor costs appear on the books. Of course, there is an opportunity cost as personnel previously assigned to other tasks are redirected to chicken preparation, but this is not recorded as a separate additional expense. Considering this structure, even if not illegal, large supermarkets’ chicken sales are structurally advantaged compared to franchise chicken businesses. This differs from a situation where high-quality/high-price strategies and medium-quality/low-margin high-volume strategies compete under identical conditions. Large supermarkets inherently possess a certain degree of inherent advantage from the outset. This is also a point where franchise chicken businesses could reasonably raise concerns.
The delivery fee issue is more complex to interpret. Dangdang Chicken does not incur delivery fees because it does not operate on a delivery premise, whereas most franchise chicken outlets provide delivery services and thus incur corresponding delivery fees. While consumers bear the delivery fee, the convenience of having chicken delivered to their desired location is a significant advantage of franchise chicken. Consequently, many chicken shops offer discounts on takeout orders above a certain amount to encourage sales.
While it’s true that franchise chicken businesses face competitive disadvantages, clear differentiators from supermarket chicken also exist. If they continue innovating—differentiating taste, diversifying menus, and improving service quality—there remains room to secure a competitive edge. Developing tastier chicken and persistently striving to lower production costs could be the solution. The emergence of supermarket chicken might also have a positive effect, spurring the franchise chicken industry to strive harder for innovation.
Meanwhile, the franchise chicken industry itself is not entirely without fault. For instance, Gyochon Chicken temporarily suspended single-item chicken sales on the Baemin app in early 2023, requiring customers to purchase only set menus that included mandatory side dishes. This practice, forcing customers to buy specific sides when ordering chicken, could be interpreted as a deceptive bundling tactic and an indirect price hike, raising concerns about potential illegality.
Furthermore, franchise headquarters often hold a dominant position in their relationship with franchisees. In this context, headquarters repeatedly face criticism for designating an excessive number of items as mandatory purchases sold at high prices, or for taking legal action or exerting pressure against franchisees who resist. Such practices may violate the Fair Trade Act, necessitating appropriate intervention and regulation by government authorities to resolve the issue. If the spread of supermarket chicken worsens the profitability of franchise companies and reduces the number of people attempting new startups, the headquarters may also be inclined to cut unnecessary costs and focus more effort on quality improvement. In this process, there may also be room to improve existing structural problems, such as offering franchisees more favorable contract terms. This is a positive effect that competition can bring. Thus, the market entry of new products brings about various changes.
However, not all companies can survive forever. As numerous companies enter the market and some achieve great success, those unable to secure a competitive edge may see declining sales and ultimately exit the market. This process is necessary to spur corporate innovation, ultimately benefiting consumers as well. While regulation against collusion and monopolies is essential, this is precisely why companies eliminated by competition cannot be unconditionally protected.
However, protection for workers and the unemployed must be strengthened. In labor-management relations, workers are structurally prone to being placed at a disadvantage. Indeed, it has been pointed out that supermarket workers preparing Dangdang Chicken also suffered from excessive workloads for a period shortly after its launch. Furthermore, since situations where large-scale unemployment occurs due to corporate bankruptcies or restructuring are difficult to avoid, strengthening social protection and support for the unemployed is an essential task from the perspective of fairness.
Thus, competition between companies is a process where the gains and losses of various stakeholders are intricately intertwined. While competition can spur innovation, it simultaneously carries the risk of fostering unfair competition. Moreover, in this process, not only other companies but also consumers and workers are all affected, directly or indirectly. Therefore, when evaluating corporate competition, a balanced perspective is required that considers not just the gains or losses of any single party, but the positions of all the various affected stakeholders.
