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Why goods cost more in Korea

One may say there are two Korean economies ― one domestic and the other international.
May 31,2017
While there are many positives of living in modern-day Korea, one of the most irksome drawbacks is retail pricing.

Recently, Dongseo University Prof. Justin Fendos reviewed Korean food prices in the The Diplomat. His case study pointed out the seemingly irrational pricing with which we are very familiar. Ironically, local independent retailers are actually quite generous, often applying ad hoc discounts or throwing in “freebies” out of kindness.

But small retailers, as well as less emotional large stores, are stuck with a fundamental problem that we have long recognized: large Korean producers routinely raise prices for whatever alibi and keep them up after the rationalized reason has passed simply because they can get away with it.

There is no effective consumer union or movement here. There is the government’s Korea Consumer Agency that does commendable work in righting individual wrongs. But I have yet to see any real reform being proposed. There are nongovernmental organizations concerned with consumer rights, but they are woefully under-financed. These consumer NGOs occasionally issue reports documenting price gouging. Sometimes these reports even make it on to television new programs. Most often they focus on comparisons of domestic pricing of imported goods compared to the same products’ prices overseas. Less common does one come across investigations about pricing gouging solely within the domestic market.

In any case, pundits simply shake their heads in disappointment and move on. There seems to be no meaningful follow-up like consumer boycotts. Perhaps things may change under a new, more liberal Korean president, but in the past, I can only guess what would have happened to NGO leaders if they attempted to organize consumer movements that would have threatened the status quo. In any case, Korean consumers simply tolerate price gouging.

For example, the most expensive place to buy Apple gear in the world is Korea. The same goes for Korean-made electronics such as televisions. In fact, my wife and I bought our Samsung television from Amazon during a Black Friday sale. Even with international shipping and duty, the total cost was substantially below local retail pricing, and we were hardly unique. As a result of unfair retail pricing, there is a small underground industry of Korean professional overseas buyers who buy products locally and send them to their buyers in Korea.

Most Korean photography professionals, for example, get their expensive gear via Korean buyers in the United States and elsewhere to get around expensive handling and shipping charges. The primary motivation for Korean photographers to buy locally is for after-sales support because many companies limit support to products purchased within Korea. At the same time, there is another set of unauthorized repair companies that service gear purchased from outside Korea.

The end result is an inefficient market that has limited retailing of a surprisingly small variety of goods compared to what is offered in even less developed markets in Asia and elsewhere. Instead, we have a market of overly priced, similar products, almost all domestically produced. Local small enterprise innovation is curtailed by an inefficient distribution system dominated by the same chaebol that offer competing products.

As such, specialty buyers tend to look to eBay, Amazon and overseas Korean buyers. Too often Korean representatives of foreign specialty goods are hole-in-the-wall offices offering limited choice of products on hand and at premium pricing.

For several years, I worked in the business-to-business software industry selling to chaebol. I remember our big customers once announcing during a severe recession that they were unilaterally reducing payments on our monthly licensing fee by 50 percent. They unabashedly admitted at the outset that following the recession, once they return to previous profitability, they would not return to the contracted monthly fees. They assured us they would indefinitely keep payments at the special recession-level pricing, contracts be damned. And, of course, they kept their promises.

Our customers’ core operations depended on our software and we technically held these customers by the short hairs. But our Western executives crumpled in the face of chaebol demands. There was no tolerated thought of reaching out to other providers, who were facing like demands, to collectively force the chaebol to honor their contracts following the recession. In short, we vendors were wimps, and the bullies got their way once again.

As the old adage goes, “Whoever holds the gold makes the rules,” and that applies in spades to Korea, where the notion of fair pricing is at best a vague concept. Understandably, this is the plight of vendors dealing with Korean corporate buyers. Ironically, this same principle does not apply to individual consumers. Individually, private consumers are too puny compared to their service providers.

In fact, one may say there are two Korean economies — one domestic and the other international. Even with free trade agreements, there remains many hidden trade barriers that keep this market still relatively protectionist and mercilessly exploits domestic buyers. Thanks to passive consumers and cowered vendors, the large companies are able to generate much larger profits at home than they can overseas. So much so, one may well conclude that the domestic economy underwrites the international one. So are we stuck with the overall matter? Maybe not. The demonstrations we witnessed over the past months were not simply anti-Park Geun-hye. More fundamentally, millions demonstrated against economic as well as political injustices. Who knows? Someone or some event may snap consumers out of their traditional ennui, and we may see sudden reform. If that happens, it won’t be the first time for Korea.

*The author is the owner of Onsite Studios, publisher of the Korean Economic Reader and author of two books on doing business in Korea.

Tom Coyner