Analysis Of Antitrust Issues Raised By B2B Exchanges: Practical Guidelines And Insights From The FTC B2B Workshop

Article By Robert E. Bloch And Scott P. Perlman

Introduction

In connection with its workshop on business-to-business ("B2B") exchanges on June 29- 30, 2000, the Federal Trade Commission ("FTC") posed a number of questions regarding the public policy implications of B2Bs, including:

What competition issues may be raised by B2B electronic marketplaces? What are likely procompetitive benefits, and what are possible anticompetitive concerns?

Under what circumstances are B2B electronic marketplaces likely to increase or diminish competition? What has been the experience so far?

How do B2B electronic marketplaces affect entry at the buyer or seller level? How does entry occur in the market for B2B electronic marketplaces?

What issues are relevant to structuring and implementing B2B electronic marketplaces in order to realize efficiencies and avoid competitive problems? For example, what mechanisms might be included to prevent inappropriate sharing of competitive, confidential information? Are any of these mechanisms likely to be impractical or undesirable from a business perspective?

Does the development of competition within and among B2B electronic marketplaces depend in part on any intellectual property rights relating to the design or operation of such marketplaces?

What implications, if any, do B2B electronic marketplaces have for market structure and market concentration?1

The following is a brief analysis of these issues as they arise in connection with a hypothetical B2B exchange being formed by wholesalers in the toy industry. The analysis attempts to provide practical guidance to those forming or advising a B2B exchange based both on traditional antitrust principles as well as insights gained by the authors' from the FTC Workshop.2

Hypothetical Toy Wholesalers B2B

A, B, C and D are four major wholesalers of toys (the "Wholesalers"). Together they account for approximately 50 percent of all purchases from toy manufacturers. The Wholesalers propose to form a business-to-business on-line exchange to facilitate transactions between themselves and both toy manufacturers and retailers (the "Exchange").

The primary purpose of the Exchange will be to eliminate costs from the toy manufacturer-to-retailer supply chain. The Wholesalers believe that use of the Exchange for on-line purchasing will reduce transaction costs and facilitate "reverse auctions" -- in which sellers are required to bid against each other for a purchaser's business -- that will result in lower product costs. The Exchange also will provide data on orders and inventory to all participants that they can use to manage production and inventory levels in a more cost efficient manner. While most of this data will be specific to the transactions being engaged in by the particular participant, aggregated data concerning other parties' purchases also will be provided. The data provided by the Exchange will include certain data on orders and inventory that had been provided to customers by the Wholesalers on an individual basis. The Exchange will provide this and other data for a fee set by the Exchange's Board of Directors.

The Wholesalers contemplate that the Exchange also may engage in certain joint purchasing activities on their behalf, and may combine certain ordering and warehousing functions. For example, the Exchange may create a common ordering system that will be used by all of the Wholesalers, and may manage a process by which the Wholesalers' will lease space to each other in their respective warehouses in order to use available warehouse space in the most efficient manner possible.

The Exchange will be governed by a five-member Board composed of one representative of each Wholesaler as well as the CEO of the Exchange, who will be hired by the Board but will not be a current or former employee of any of the Wholesalers. The Wholesalers will be prohibited from forming or taking an equity interest in any competing exchange for five years after formation of the Exchange, and will be prohibited from making purchases or sales through any other exchange for three years, after which each Wholesaler agrees to make 80 percent of both its purchases and sales through the Exchange.

The Exchange Board may vote to admit other wholesalers as equity partners in the Exchange. Such members will be required to adhere to the same non-competition and purchase requirements as the Wholesalers. The Wholesalers also will encourage as many wholesalers, manufacturers and retailers as possible to conduct transactions through the Exchange. The Exchange Board will set criteria for participants, however, including standard technology that must be used by all participants and financial criteria.

Issues Raised by the Formation and Operation of the Exchange

The formation of a business-to-business marketplace like the Exchange by competitors is analyzed as a joint venture or competitor collaboration under the antitrust laws. See Antitrust Guidelines for Collaborations Among Competitors, issued by the FTC and the U.S. Department of Justice ("DOJ"), April 2000 ("Collaboration Guidelines"). See also "FTC enforcers believe B2B auctions are similar to JVs," FTC Watch, April 10, 2000, 6 (report of discussion by David Balto, Assistant Director, FTC Policy and Evaluation Office) ("Balto Article"); "The Evolution of Electronic B2B Marketplaces," Susan S. DeSanti, Director, Policy Planning, Federal Trade Commission, Remarks before the Federal Trade Commission Public Workshop: Competition Policy in the World of B2B Electronic Marketplaces, June 29, 2000 ("DeSanti"), 8.

The formation of a joint venture by competitors can raise two general categories of issues under the antitrust laws: (1) structural issues under Section 7 of the Clayton Act, which prohibits mergers that are likely to substantially lessen competition or tend to create a monopoly; and (2) operational issues under Section 1 of the Sherman Act, which prohibits conspiracies that result in unreasonable restraints of trade.

The principal structural issues raised by the Exchange are:

Monopoly or Market Power. Whether, by combining certain activities through the Exchange, such as providing data to customers on orders and inventory, the Wholesalers will be able to exercise market power, i.e., the power to raise prices above competitive levels or to exclude competitors in any relevant market in which they provide products or services.

Monopsony. Whether, by combining certain purchasing activities through the Exchange, the Wholesalers will be able to exercise monopsony power, i.e., the power to drive prices for the purchased product(s) or service(s) below the prices that would prevail in a competitive buying market, thereby depressing output of the product(s) or service(s). See Collaboration Guidelines, Section 3.31(a).

The principal operational issues include:

Legitimacy. Whether the Exchange is a legitimate joint venture that will produce new products or significant procompetitive efficiencies that the Wholesalers could not have achieved separately, or a cartel formed to enable the Wholesalers to fix prices, allocate markets or purchases, or commit other anticompetitive acts.

Collusion. Whether the Exchange will facilitate collusion between competitors among any participating wholesalers with respect to the prices of the products and services they sell to retailers, among manufacturers with respect to the prices of the products they sell to wholesalers, or among retailers with respect to the products they sell to consumers. Such collusion could result from the operations of the Exchange in a number of ways, including:

Wholesalers will purchase such a high percentage of their supplies through the Exchange at the same prices that a large percentage of their costs will become standardized, which will make collusion on the prices of the goods and services they sell easier. See Collaboration Guidelines, Section 3.31(a).

Participation by the Wholesalers in the governance and operations of the Exchange, including meetings of the Board, will provide opportunities to discuss the costs of supplies and the prices of the products and services they sell.

Wholesalers will obtain access to data provided to the Exchange concerning the prices at which competing wholesalers sell goods and services to retailers, which information could be used by competing wholesalers both to reach an agreement on prices and to monitor compliance with such an agreement. See Collaboration Guidelines, Section 3.31(b).

Wholesalers will obtain access to data provided to the Exchange concerning the purchases of competing wholesalers, including information regarding the costs and quantities of such purchases, and other cost data (such as the internal cost of warehousing space) which information could be used by competing wholesalers both to reach an agreement on prices and/or to monitor compliance with such an agreement (e.g., by monitoring costs and, indirectly, quantities sold to...