The Korean Air-Asiana Airlines Merger Shows How Rational Actors May Produce Irrational Outcomes

Abstract

This article explores why the Korean Air-Asiana Airlines merger—a merger that would create a two-to-one monopoly in Korea—was promoted and approved by Korea’s government, including the competition authority (KFTC), in 2021. Unlike most existing studies that focus on explaining ’how bad’ the merger is for consumers and competition, this paper seeks to explain ’why’ this suboptimal decision was made by the government which has typically taken an aggressive and vigilant stance against monopolization, strongly favoring competition policy.

Assuming that government decisions are the aggregate result of individual choices constrained by given institutional settings (following a public choice or rational choice institutionalism perspective), this paper's analysis mainly focuses on the preferences of key individuals (including composite actors, like departments or agencies) and the institutional constraints they faced during decision-making.

By examining the decision-making processes, rather than assessing the outcomes, and interactions among key actors—the Korea Development Bank, government ministries, Korean Air, the KFTC, and their decision-makers, as well as third parties such as consumers—this article uncovers that the institutional settings for merger policy in Korea were structured in a way that led individual choices to result in a suboptimal outcome in the end, especially at the societal level.

Based on the research findings, I propose some institutional reforms in the conclusion section.

NOTE: This article is based on my recently published paper "Why Korea's Merger Control Occasionally Fails: A Public Choice Analysis of Korean Air/Asiana Airlines," co-authored with Hwang Lee at Korea University, which is available at https://ssrn.com/abstract=4862251.