Econometric Damage Estimation from the Bid Rigging in the Korean Military Oil Procurement Auctions during 1998-2000

Sonku Kim
Inkwon Lee
Keunkwan Ryu
Sang-Seung Yi

March 2010


In October 2000, the Korean Fair Trade Commission levied a combined surcharge of 190 billion Korean won (roughly $170 million) against the five major oil refineries in Korea for colluding in the military oil procurement auctions between 1998 and 2000. At the time, it was a record surcharge ever imposed by the KFTC since its establishment in 1981. Based on this ruling, in February 2001, the Korean Ministry of Defense filed a civil law suit against the 5 oil companies asking for damage redemption of 158.4 billion Korean won (out of a total purchase payment of 712.8 billion Korean won). The Seoul Civil District Court commissioned the Center for Corporate Competitiveness at Seoul National University to assess the damages. This paper is a summary of our findings. In particular, we have applied “difference in difference” techniques to estimate the damage amount using micro level panel data covering military and nonmilitary oil procurement auctions for the period 1995-2002. In 2007, the district court largely based its damage award of about 90 billion Korean Won on our implementation of the “difference in difference” estimation method. However, in 2009 Seoul High Court rejected the district court's ruling in favor of a crude “yardstick” estimate of roughly 140 billion Korean Won based on the spot prices in the Singapore market. The Seoul High Court argued that it rejected econometric damage estimates because of the huge differences in damage estimates of the the Court-appointed experts (112 billion Korean Won) and those of the experts by commissioned by the defendants (12 billion Korean Won). We compare different assumptions, models, estimation techniques, and see how the estimated damage amounts change. In particular, we argue that the Seoul High Court made the critical error of not distinguishing between the idea of “difference in difference” method (on which both groups of experts agreed as the proper estimation method) and the econometric implementation (which lay judges may have a hard time to understand).

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