[Insight & Opinion] Is Price Control in the Ramen Market Justified?

Consumers inevitably remain sensitive to food prices. The government deliberately controls the prices of certain products by emphasizing their status as affordable food for the common people. The ramen market is a prime example. Last year, the annual per capita ramen consumption in Korea was 77 packs. On average, Koreans consumed ramen every 4.8 days. This shows how popular ramen is as a food item. Consequently, regardless of the actual effect, the government is sensitive to ramen prices during periods of inflation. In fact, this policy can only be seen as having political rather than economic effects.

According to actual statistics, the consumer price index weighting for ramen is only 0.27%, so the impact of lowering ramen prices on overall inflation is practically negligible. Additionally, ramen prices inevitably follow the price of wheat flour, its raw material. From a company's perspective, it is necessary to maintain a certain profit margin considering production costs. Moreover, in a market economy, it is natural that product prices are determined by consumer preferences and competition among suppliers. If the government artificially forces price reductions on normally priced products, market disruption is inevitable. For example, companies might lower prices on government-controlled products and compensate for losses by raising prices on other products. This price transmission becomes easier as the variety of products increases and market share grows, ultimately causing greater shocks to small producers who are the core of competition in a market economy.

Ultimately, the justification for government price control should be limited to cases where companies enjoy abnormally high margins. Even the Governor of the Bank of Korea recently commented that corporate margins have risen significantly, likely to justify government policies regardless of the factual situation.

So, what is the actual margin rate in the ramen market? According to recent research by Professor Kim In-kyung of Sogang University and the author, the margin rate in the ramen market has remained around 20% over the past decade with little change. Even over the long term, ramen price increases have been relatively low compared to other products using wheat flour as a raw material. If the average ramen price in 1985 is set at 100, the average price in 2019, over 35 years later, did not even reach 300. In contrast, prices for bakery products and biscuits rose from 100 to about 450 and 750, respectively, during the same period. Considering these products use the same wheat flour raw material, the distortion in ramen market prices is evident. In fact, ramen prices have barely changed since 2008.

The Fair Trade Commission once misinterpreted this suppressed price fluctuation in the ramen market as a possibility of collusion and filed a complaint. Using economic demand analysis models, margin rates can be examined under hypothetical market behaviors. According to the aforementioned study during the same period, the ramen market’s margin rate is far from that of a collusive market. In fact, the ‘Big 4’ ramen companies hold nearly 90% market share. Assuming no collusion and that these ‘Big 4’ companies enjoyed normal margins without price control, the margin rate should be over 40% at such a high market share. Given that the actual margin rate has remained around 20%, it appears that the market is not collusive but rather significantly distorted due to government policies.

The government’s efforts to stabilize prices are an important economic policy, especially during times of high inflation like now. Nevertheless, policies rooted in political intentions that diverge from real economic effects are problematic.

Kim Gyu-il, Professor at Michigan State University

This content was produced with the assistance of AI translation services.