Abstract

High switching costs negatively impact market competition by limiting consumers' ability to respond to changes in product
quality price by switching service providers. Early termination charges are an important part of consumers' switching costs, and excessive early termination charges can limit the benefits of competition (freedom of choice, lower prices, innovation, and higher quality) by making it difficult for consumers to switch providers.
Reflecting the nature of telecommunications contracts, where the discount rate increases with the length of the contract,
domestic telecommunications early termination charges(discount clawbacks) operate by returning a portion of the discounted rate in order to ensure that consumers who terminate early should be charged a higher rate than the rate applied contractual discount percentage. Domestic early termination charges(discount refunds) are different from the general standards for reasonably estimating damages (fulfillment gains, compensation for loss of trust), but they are advantageous to users in the event of early termination due to lower penalty amounts at the beginning of the contract. However, it has been pointed out that the penalty rate is quite high due to the long contract period and high discount rate of domestic fixed-line products, and there is a significant period of time in the second half of the contract period when the amount of early termination charges is higher than the residual fee, which substantially limits the user's right to terminate. As a follow-up to the 'Plan to Promote Competition in the Telecommunications Market', the Ministry of Science and ICT improved the Internet early termination charges by increasing it up to half of the contract period and then decreasing it to zero at the end of the contract.
In overseas telecommunications markets, an increasing number of companies have voluntarily abolished handset subsidies and abolished contractual agreements and early termination charges, and the level of the early termination charges has been significantly reduced. In Korea, to promote competition in the mobile telecommunications market, the system will be improved to prioritize one-year contracts over two-year contracts, greatly easing the burden of user termination penalties.
The improvement of the internet discount refund system and the system that prioritizes one-year contracts when signing
up for an optional contract will significantly reduce the early termination charges in the telecommunications market, improving users' choice and mobility. The improvement of the system that prioritizes one-year contracts when signing up for optional contracts not only reduces the early termination charges by half, but also facilitates the switching of telecommunication services by reorganizing the usage period of telecommunication contracts to one year, which is expected to increase competition in the telecommunication market. Handset subsidized users will remain on two-year contracts, while the optional contract system will be reorganized to focus on one-year contracts, which is expected to lead to overall changes in operators' subsidy and rebates strategies.