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Excerpted From: Felix B. Chang, Ethnically Segmented Markets: Korean-owned Black Hair Stores, 97 Indiana Law Journal 479 (Winter, 2022) (296 Footnotes) (Full Document)


FelixBChangSegmented markets are the product of markets dividing to serve groups with similar supply or demand preferences. In ethnically segmented markets, that division occurs due to ethnic or racial preferences. For instance, an all-white homeowners' association might exclude African Americans from a neighborhood to inflate home values, thereby segmenting its housing stock. More innocuously, grocery stores in a diverse city might cater to the segmented food preferences of its ethnic residents.

The most puzzling--and disconcerting--ethnically segmented markets, however, are ones where consumers hail from one ethnic or racial group while sellers hail from another. Such markets present a conundrum: why are buyers and sellers ethnically distinct?

The piecemeal literature on ethnically segmented markets does not provide a satisfactory answer. In economics, the debate has revolved around whether racial preferences are inefficient and, by extension, whether ethnically segmented markets should yield to market integration over time. Neither side convincingly explains why some ethnically segmented markets thrive as a misalignment of ethnically distinct buyers and sellers. After all, ethnically homogenous consumers should prefer to buy from co-ethnic producers.

Legal scholars tend to examine ethnically segmented markets from the side of producers rather than consumers. Borrowing from antitrust theory, race and law scholars have framed the exclusion of peoples of color from housing and labor markets as a mechanism of racial cartels. In law and development circles, one camp of scholars has emphasized structural explanations for the dominance of ethnic groups in niche markets, typically against the backdrop of exclusion of all peoples of color from mainstream economies. By contrast, another camp has fixated on the institutions, relationships, and private ordering peculiar to ethnic communities. In totality, however, legal scholars have not articulated a comprehensive theory of markets that are both ethnically segmented and ethnically misaligned.

Sociology presents the most exhaustive treatment of these markets, though it, too, falls short in explaining the persistence of ethnic misalignment. Here the seminal work revolved around middleman minorities--sojourners such as Chinese, Jewish, Indian, Korean, and Lebanese merchants who mediate between majority and other minority groups. Over time, this framework morphed into “ethnic entrepreneurs” to cover non-itinerant groups. Nonetheless, it continued to miss the business tactics that enable in-group sellers to maintain dominance over out-group competitors.

To unify the disparate approaches across law, economics, and sociology, this Article articulates a theory for the endurance of ethnically segmented markets where producers hail from one ethnicity while consumers hail from another--a concept this Article calls ethnically segmented and misaligned (ESM) markets. As its first step, the Article proffers a definition of ethnically segmented markets that encompasses all three disciplines. The Article's central contribution is to bring clarity to this concept, which has spanned multiple fields with no coherent framework.

Focusing on the retail of wigs and hair extensions to African Americans, which is dominated by Korean American firms, this Article illuminates that most peculiar of segmented markets--where buyers and sellers are ethnically homogenous but misaligned. The size of the market for wigs and extensions is estimated at $6 billion. It is delineated along racial lines, with African American women comprising the largest segment. Due to a confluence of societal pressures and beauty standards, African American women are steadfast consumers; hence, demand in the market is inelastic, which tends to confer market power to producers.

This Article argues that Korean American sellers (the market's main producers) maintain dominance not through structural or cultural advantages, but by collusion and exclusion. In mainstream economies, these strategies are employed by so many dominant firms that they have become the staple of antitrust cases. In ESM markets, however, coordination and exclusion assume a sociological dimension, with anticompetitive effects reinforced by co-ethnic bonds. During the 1970s, a combination of economic forces, racial structures, and shifting beauty standards initially propelled Korean-owned firms to power. This Article focuses on how Korean American retailers leveraged and maintained that power in the face of challenges by African American competitors. In these markets, retailers managed to band together intra-ethnically and fend off competition interracially through tactics that can be conceptualized as antitrust offenses.

Antitrust is an apt springboard for analysis because African Americans often frame their relationship with Korean American retailers in anticompetitive terms. It is often asserted that Korean American firms exert a “monopoly” over, and have “monopolized,” Black beauty supply stores. Yet monopoly and monopolization have specific meanings that demand careful market power analysis. Working through the requisite steps infuses the literature on these buyer-seller interactions (and, accordingly, interethnic interactions) with rigor. Further, the interactions between African American buyers and Korean American sellers occur wholly outside the ambit of the state and therefore out of the purview of public law. That race relations often unfold as private transactions under private law is well understood. Arguably, where transactions between races can be characterized as buyer-seller transactions, as in ESM markets, laws governing commerce are more appropriate than antidiscrimination laws as a point of entry.

Insights about ethnically segmented markets can push the boundaries of antitrust as well. The endurance of Korean American firms suggests that collusive and exclusionary schemes may be more stable than antitrust theory holds. Further, measuring market power at the firm level may not always be appropriate. While the literature on cartels has centered on a small number of large producers, coordination among a multitude of small firms in ESM markets is possible. This coheres with the axiom from sociology that an ethnic group withdraws into itself, strengthening co-ethnic bonds, when threatened by exogenous forces. This Article's second major contribution is therefore the discovery that in-group producers can coordinate against and exclude out-group competitors by utilizing ethnic bonds.

The remainder of the Article proceeds as follows: Section I synthesizes the treatment of ethnically segmented markets in law, economics, and sociology to provide an edifice for the concept. Section II introduces the market for wigs and hair extensions as a template for ESM markets. Section III works through the market power of Korean American retailers. In doing so, it considers how this market pushes the boundaries of antitrust doctrine. Finally, Section IV anticipates how the infusion of race and ethnicity upends several assumptions in antitrust.

Before this Article proceeds further, an explanation of terminology is in order. First, this Article refers to “ethnically” segmented markets rather than “racially” segmented markets even though the latter could suffice for the retail of wigs and hair extensions to African Americans. African Americans, of course, are a racialized group, while Korean Americans are an ethnicity within the Asian American racial group. Their misalignment in this market is both ethnic and racial. Nevertheless, the Article adopts “ethnic” for consistency with the sociological literature, which refers to ethnic entrepreneurs. This also attains a greater degree of precision regarding the producers (i.e., Korean Americans), rather than subsuming them in a larger racial category (i.e., Asian Americans, whose diverse constituents exhibit differing rates of entrepreneurship). This specificity is consistent with the antitrust notion that markets must be defined as narrowly as possible to accurately capture market power.

[. . .]

The stakes are high for getting ESM markets right. In the United States, interactions between peoples of color often unfold as commercial transactions in markets where groups are pushed into close quarters, hemmed in on all sides by structural racism and systemic exclusion. When, as in the wigs and extensions market, those markets are ethnically misaligned, intergroup tensions can be inflamed. Such tensions exploded in 1992 with racial unrest in Los Angeles, but it was not an anomaly. Korean American-owned wig stores were destroyed during protests in Ferguson, Missouri, in 2014 after prosecutors failed to indict Michael Brown's killer and also in Baltimore in 2015 after the funeral of Freddie Gray.

As the very first step, a proper understanding of ESM markets is critical. This Article has synthesized the disparate literature on ethnically segmented markets to create the theoretical foundation for ESM markets. In using the wig and extensions market as an illustration, the Article reveals how ESM markets challenge traditional notions of market power and oligopoly stability. Hence, ESM markets and antitrust doctrine are mutually illuminating.

More empirical work must be completed before we can determine whether antitrust law conveys any recourse to African American retailers and consumers in the wig and extensions market. However, for the first time in decades, this market is changing quickly from new sourcing strategies that have bolstered the hand of African American competitors. The old guard of Korean American retailers is also aging out, and their children may eschew this hardscrabble business, with its intense competition, diminishing margins, and interracial tensions. Given the dynamic process of racial and ethnic formation, these children may not even feel the same fidelity toward co-ethnic bonds. Thus, by the time antitrust has devised a solution, this market may have outgrown the need for redress.

Professor and Co-Director, Corporate Law Center, University of Cincinnati College of Law. Affiliated Fellow, Thurman Arnold Project, Yale School of Management.

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