Gov’t to look at network effects during digital merger reviews

[Courtesy of The Korea Fair Trade Commission]

The South Korean government will add “network effects” to its standards for corporate mergers and acquisitions review as platform companies continue expanding their influence.

According to the Korea Fair Trade Commission (KFTC) on Monday, a revised set of merger and acquisition review criteria that reflect the characteristics of the digital economy is set to take effect in the beginning of May 2024.

The revised merger review criteria’s focus lies in the idea that businesses providing digital services have different characteristics from existing ones, with free services and network effects being the most prominent. Network effects are created when many users use a specific service, thus generating additional demand and increasing its market dominance.

“Although free services and network effects have been considered during the merger reviews, we sought the revision to explicitly include them as part of the criteria and give companies more predictability,” a KFTC official explained.

The revised review criteria explicitly state that the antitrust authority should consider network effects when analyzing the effects of competition restrictions, and the method of defining a market for free services provided by platforms was also clarified. Defining a market involves identifying businesses that compete with the companies undergoing mergers and specifying the scope of competition.

The scope of simplified reviews has also been clarified. Under the existing review criteria, mergers with minimal impact on the market undergo a simplified review process wherein the declaration is factually verified. Under the revised review criteria, if an online platform acquires a business in another industry that supplies services unrelated to its own and the acquired business is a supplier of goods or services to an average of more than 5 million people per month with sales or assets of over 30 billion won ($21.8 million), the acquired business will undergo a general review.