Federal Trade Commission Workshop on May 7-8, 2001 Washington, D.C. Comments Regarding E-Commerce B2B BASICS AND ANTITRUST ISSUES by Pamela Jones Harbour(1) I. INTRODUCTION A significant and increasing portion of business-to-consumer ("B2C") sales now occurs on e-commerce Internet websites. While this trend promises to fundamentally alter the way that consumers buy goods (a promise that may or may not be fulfilled), the advent of Internet-based electronic business-to-business exchanges ("B2B") has already revolutionized the way businesses interact in buyer/seller and other transactions.(2) The gradual conversion of paper-based transactions (i.e. legacy systems(3)) to automated electronic business-to-business commerce increased exponentially with the advent of the Internet. Suddenly, businesses from industries, which had formerly considered network computer-based solutions too expensive or difficult to use for their supply chain needs, could participate in a type of business-to-business commerce that promised not only cost savings with existing suppliers and customers, but the opportunity to enter into previously unattainable business opportunities. Companies which already had made steps to implement electronic business-to-business solutions made quantum leaps in their systems' capabilities. This emerging business phenomenon promises increased efficiency, productivity and profitability together with lower prices. But a basic feature of B2B exchanges, which allows competitors to share information and collaborate, raises potential antitrust concerns. As a result, the government enforcement agencies, academia and the private bar have begun to take an interest in B2Bs, seeking to understand the way e-marketplaces work and the benefits they may offer, as well as the potential dangers they may create if improperly structured or managed. This article attempts to describe the progress to date in that effort by first laying the framework for understanding what B2B electronic marketplaces are; how they have developed; how they work; why companies should want to participate in them; how they are likely to evolve in the future; and an analysis of the potential antitrust pitfalls and how businesses can avoid them. II. WHAT ARE B2B ELECTRONIC MARKETPLACES? B2B electronic markets (hereafter "B2Bs") are Internet-based electronic markets designed to allow online business-to-business communications and transactions.(4) B2B participants include suppliers, distributors, commerce services providers, infrastructure providers and customers. The driving purpose of B2Bs is to create virtual markets(5) that allow companies which must purchase intermediate goods (as part of the process to develop and deliver a final product or service) to communicate and transact business more efficiently with their suppliers. That purpose has several distinct elements. The buyer needs to search for, identify, negotiate for, order and receive the materials and then pay the supplier. Some or all of this is accomplished through a standardized online format. B2Bs are also branching out into additional areas of supplier/customer interaction that may be handled more efficiently through the B2B interface, including joint product or component design. Although B2Bs now involve commerce in most industries, there are certain industries for which B2Bs are especially useful. Those include highly segmented buyer and seller markets; markets with unpredictable offering and demand; and commodity or indirect products markets.(6) For example, Metalsite.com, a neutral exchange platform, describes itself as a global site that facilitates buying and purchasing of metal and metal products.(7) The metals industry is unconcentrated or highly diffuse; a major firm holds roughly 3.5% market share.(8) Metalsite.com brings together parties to facilitate the purchase of a market-specific metal commodity. III. HOW DID B2Bs DEVELOP? It is important to place the current generation of B2Bs in the historical context of the e-business communication technologies from which they grew (so-called legacy systems for automating business-to-business commerce) for two reasons. First, legacy systems are cited by the FTC Staff Report as "one baseline from which the efficiency gains attributable to Internet commerce may be measured."(9) And second, legacy systems remain in wide use as "back office" systems that must link to the new B2Bs. In ascending order of complexity (and descending order of age), legacy systems include Materials Resource Planning software ("MRP"), Enterprise Resource Planning software ("ERP"), and Electronic Data Interchange ("EDI") systems. An MRP system is a software package that allows a manufacturer to more closely track its purchasing needs by integrating its parts requirements with its production schedule, thereby allowing the company to generate a "shopping list" of required inputs at regular intervals. An ERP system also integrates human resources administration and financial accounting components into the reporting and tracking system, further streamlining additional elements of the procurement process. Finally, EDI systems have taken the first step out of the corporate infrastructure by also allowing the client to place orders directly to its suppliers. Most of these steps toward standardization provide significant benefits only for the largest firms. The Internet -- with its lower costs of connectivity, computing and information infrastructure -- extends the benefits of efficient business-to-business electronic commerce to the majority of businesses. B2Bs can allow companies to build on their existing legacy systems by integrating new technologies that allow them to retain their back office systems for internal company use and still make use of a B2B. This is accomplished by integrating the B2B software functions in such a way that orders processed through the legacy system will not have to be manually re-entered into the B2B system. IV. HOW DO B2Bs WORK? There are two primary components of a B2B: the "infrastructure" or underlying architecture of the B2B and the "exchanges" or websites where buyers and sellers actually interact. One useful analogy compares B2Bs' functions to the parts of a windmill: "the base of the windmill represents the many facets of B2B [infrastructure], and the blades of the windmill represent web-based B2B marketplaces . . . that link buyers and sellers. . . to create a [virtual] cycle of business communications."(10) The B2B infrastructure includes logistics applications, application service providers, application integration software, Internet-based commerce enablers, and security applications. Web-based B2B exchanges -- the part of the system that participants actually see in action -- may also include online catalogs, auctions, reverse auctions, and several breeds of inventory and fulfillment functions.(11) A. B2B Infrastructure B2Bs owe their existence to the proliferation of Extensible Mark-up Language ("XML")(12), which is the B2B "alphabet" that allows efficient Internet communication by providing a uniform way to describe all the required fields in a purchase order and thereby creating an open environment for business-to-business communication.(13) In addition to XML, there are numerous other technical issues that require innovative solutions to create a functioning B2B marketplace. The companies that create and manage the technical solutions for each B2B are called infrastructure companies.(14) Infrastructure companies provide the technical platform that defines the functioning parameters of the B2B, and after helping establish an online B2B, the infrastructure companies often take an equity stake in the B2B. These companies are highly specialized and have developed their own niche within the B2B infrastructure sector. Leaders in the B2B infrastructure field run the gamut of technical solutions, and include, for example: Commerce One, which specializes in procurement software; FreeMarkets, which focuses on auction software; VerticalNet, which emphasizes site content; i2, which aims to streamline "back end integration"; and Ariba, focusing on bringing an "online ecosystem" one-stop setup for their clients.(15) B. B2B Markets There are several ways to classify current B2B markets. The primary distinctions are based upon the nature of the participants, the mechanisms used for pricing, the revenue model employed, and the ownership structure of the B2B. These distinctions have antitrust implications, as discussed below.
B2Bs may help link commerce between multiple industries (known as horizontal markets) or within a single industry (known as vertical markets). Horizontal marketplaces typically help buyers purchase a wide variety of operating inputs (also known as indirect materials) which are referred to by the acronym MRO,(16) for the maintenance repair or operation functions that they serve. (A common example of an MRO input is the light bulbs used to illuminate a factory.) One example of a horizontal B2B firm is Liquidation.com, which facilitates the buying and selling of excess inventory and surplus assets among B2Bs. By contrast, vertical B2B markets usually serve one industry by providing direct inputs, i.e. the raw materials or components used directly in the manufacturing process, typically along with product expertise and in-depth industry knowledge. An example of a direct input would be the steel used by an auto maker to manufacture a car body. These are not hard-and-fast rules, however. There are horizontal B2B marketplaces which supply direct inputs, as well as vertical markets that offer MRO products along with the direct inputs required by their particular industry.
Although other pricing methods are possible, currently there are four primary means by which participants can establish prices in B2B marketplaces: catalogs, auctions, exchanges, and negotiations. Although catalog pricing is usually fixed, the other means of pricing are dynamic. The goal of all of these methods is to bring greater transparency(17) to the pricing process and thereby increase the efficiencies of the B2B market.
Some B2Bs rely primarily upon catalogs,(18) or use them as one of several options for purchasing. Online catalogs often represent the automation of the most fundamental, but often least efficient, segment of the procurement process -- frequent purchases of low-cost (or sometimes fixed- cost) MRO items which require no price negotiation. A prospective purchaser using an online catalog may view a broad range of different manufacturers' products with extensive product information. More importantly, buyers can make meaningful comparisons between different manufacturers' products (in regard to prices and other attributes) much faster and more efficiently than they could using traditional paper catalogs. Sellers benefit from these efficiencies by reaching previously unsolicited prospective customers. Also, sellers can adjust prices without reprinting new catalogs and can customize pricing for particular customers based on, e.g., previously negotiated discounts, without making that information available to other customers.
Auctions(19) are another means of establishing online pricing. A "forward auction" allows multiple buyers to bid on a specific product from one seller; a "reverse auction"(20) permits multiple sellers to "bid down" the price of an item sought by a specific buyer. While the bid model used will vary with the nature of the industry, the reverse auction is one of the more dynamic pricing mechanisms of numerous B2Bs. Participants using FreeMarkets software, for example, can view bidding in real time. Names of participants are coded, and transactions must occur within a specified time, but generally all participants see the bids. Further, the buyer may select participating sellers and ask participants to agree to the terms and conditions of sale up front. Buyers may even make adjustments for quality, location or other factors and determine not to award the contract to the bidder with the lowest price.(21)
Electronic exchanges are similar to trading on a securities exchange, with similar anonymous, real-time matching of orders and quotes. Multiple buyers and sellers interact, with prices moving up and down during trading. This form of exchange works well for commodity-type products. Currenex, a B2B that brings together banks and corporations to trade currency, is an example of a B2B exchange.(22)
Negotiation refers to a variety of models whereby the B2B consolidates and compares information, after which sellers and customers contact one another and negotiate a private agreement. They may conduct some portion of their interaction in public view on a site and then ultimately close the deal in a private trading room or offline.
B2B markets may generate revenue via transaction fees, membership fees, service fees, advertising or marketing fees, or fees for information.(23) Transaction fees represent a traditional approach to generating revenue; however, use of this method is likely to decrease. Membership fees, or payment in order to use a site, are similarly likely to be less compatible with long-term user relationships. When a company must pay to use a site, it has invested in a single trading mode and has thereby reduced its trading flexibility, thus defeating one of the primary advantages of operating on a B2B. Service fees can be tied to value-added services, such as shipping options, chat rooms, or industry information. Advertising, especially through banner ads, is a common revenue generator because it generates name recognition for other sites, particularly sellers' sites. The collection and sale of information gathered through operation of a B2B's own site is yet another revenue-producing option. While statistical data are commonly sold, other pieces of data are considered private -- especially the price paid by a particular customer on a specific date -- or proprietary, such as the ingredients purchased by a food processor.
The most simple division in B2B ownership and control models is between B2Bs owned and operated by third parties, also known as "independent" B2Bs, and participant-owned and -operated B2Bs. Many B2Bs are hybrids; some B2Bs are owned in part by participants, whether buyers, sellers or both. At least one, Covisint, was formed by a consortium of buyers who plan to take the newly formed exchange public in the future. Similarly, there are varying degrees of B2B participant involvement in management -- whether board of directors or operational -- that range from complete control by participating companies to independent management and board membership. Although it is helpful to understand what kind of ownership and control roles, if any, B2B participants are taking, market participants are not the only owners. Other equity or ownership holders include cash investors, management partners, and technology companies (which routinely take equity when setting up the technology to enable a particular exchange). V. WHY PARTICIPATE IN A B2B? B2Bs afford many potential benefits to participants. Specific advantages include: lower transaction costs; lower information costs; lower inventory costs; allowing of cooperative buying or selling; increasing opportunities for collaborative conduct and the use of middlemen; and reduction in maverick purchasing. All of these efficiencies can generate wealth by lowering business operating costs and increasing productivity. A. Lower Transaction Costs There are several ways that companies can lower their transaction costs (also referred to as administrative costs) through the use of B2Bs. Companies that move their business-to-business commerce onto the Internet are able to engage in paperless transactions, with concomitant benefits in terms of speed, consistency, order tracking, error avoidance and reduced effort. B2B sellers may increase efficiencies by publishing catalogs online, enabling electronic orders, eliminating the need to re-enter repeat purchase orders and allowing documents to be signed online. Further savings may occur not only by reducing the use of paper for orders, but also by reducing the number of people needed to complete a transaction. The typical offline supply transaction can involve from two to nine people whose functions include supply and procurement, budgeting, auditing, review, approval, and mail room processing. Software can be programmed to set parameters for purchasing approval -- essentially "building in" or pre-programming audit and/or executive budgeting or approval functions. Software can also permit immediate ordering, reducing reliance on the traditional mail room. B. Lower Information Costs Another advantage to the B2B marketplace is its ability to decrease information costs (also referred to as search costs) that buyers and sellers incur in finding one another. The most simple example of this is faster "comparison shopping" by supply or procurement departments. Traditional offline procurement generally involves a clerk in a back room reviewing voluminous stacks of catalogs. That project, which formerly may have taken hours, can now be accomplished in minutes. Online marketplaces that profile all options from multiple vendors in one location permit a supply clerk to view available options, compare various price and other factors, and then make the entire purchase in less time than it might have taken to locate one item in a paper catalog. Another potential advantage provided by B2B participation is expansion of the range of buyers and sellers. In a B2B, it is more likely that smaller sellers have the chance for their wares to be profiled alongside larger, more established vendors, or that a smaller customer will be able to obtain detailed information that had previously only been available to accounts large enough for a seller to make a sales call. Similarly, it may be possible for a company to sell items that would otherwise be wasted -- such as unused truck capacity for a shipping company. Of course, B2Bs also have the potential to provide useful industry-specific information, through a B2B's site or via links to related sites. C. Lower Inventory Costs A third way that a business transaction may be made more efficient through participation in a B2B is by integrating back-end procurement software into the existing supply chain, thereby reducing lag time between procurement orders and fulfillment while ensuring that required inputs are available when needed. For example, when promoters set up Covisint, an auto industry B2B, organizers explained their goal was to make back-end procurement so tight that when a customer orders a GM car with leather seats, "a cow moos."(24) The goal in tying front-end orders and back-end procurement so closely in the supply chain is to eliminate inventory stockpiling in the face of unspecified or unknown customer demand. D. Cooperative Buying Or Selling For certain industries, the opportunity to participate in cooperative buying or selling is one of the greatest advantages B2B exchanges can offer participants. Aggregate purchases are utilized, for example, in the food sector to allow bulk purchases at institutional accounts. Foodservice.com caters to the institutional purchasers that are not large enough to qualify for maximum discounts through food wholesalers. By aggregating their purchases, these accounts are able to enjoy maximum savings. Although purchases are aggregated by Foodservice.com, the goods are delivered to these institutional accounts just as they were prior to ordering via this medium. E. Increase Opportunities For Collaborative Conduct And The Use Of Middlemen B2Bs can provide opportunities for the outsourcing of non-core tasks such as the direct sales process, or collaborative efforts including joint product design. Other cooperative opportunities exist through "neutral middlemen" who strive to achieve economies of scale for a group. Equalfooting.com, for example, specializes in providing a full range of purchasing, selling and borrowing services to small businesses. While it does not provide "aggregating services," Equalfooting.com works with large companies to obtain up-front discounts and terms advantageous to small businesses. They also provide free access to forums for selling products to other small businesses. F. Reduce Maverick Purchasing Finally, by creating a uniform order system, so-called "maverick purchasing" can be reduced. Maverick purchasing occurs where employees make individual purchases that are not in conformity with company policy or do not take advantage of a company discount. VI. EXPERIENCES TO DATE AND Currently more than 700 B2B markets are either operating or have been announced. Although B2Bs are optimistically projected to account for upwards of $5 trillion by 2004,(25) the recent downturn in the online business-to-consumer market has introduced some skepticism into an otherwise enthusiastically regarded sector.(26) A. Formation Trends The B2B landscape is currently dominated by two trends. The first is toward neutral firms forming exchanges that refrain from forming online alliances within the industry, such as Metalsite. The second trend is for large corporations in a particular industry to work together, often with handpicked partners, to launch sites. The largest and most visible example of this is Covisint. B. Operation Trends Regardless of whether a B2B is a neutral exchange or industry-backed, the B2Bs are pursuing multiple business models, each racing to turn a profit based on extrapolated efficiencies and network effects.(27) A remarkable diversity of business plans was revealed in late June when the FTC held a public workshop on B2B e-commerce. Market participants were divided into panels based on their e-commerce role (buyers, sellers, owners/operators). When owners and operators were asked to describe their business models, responses varied greatly. Panelists described consortium-led B2B's that were neutral in operation and invited all market competitors to participate; independently owned marketplaces (non-equity and non-ownership stakes); buyer-participant owned exchanges; seller-participant owned exchanges; and exchanges owned by both buyers and seller participants. C. The Future The diversity of business plans suggests a future with significant consolidation. Market analysts predict a three-stage market shift.(28) The first step toward market consolidation is the inevitable elimination of unnecessary or inefficient B2Bs.(29) The next step is the likely elimination of B2Bs that do not keep pace with increasingly sophisticated buyers and sellers. For example, B2Bs that cannot make a convincing case that they operate without jeopardizing user privacy are likely to fail during the second round of phase-outs.(30) To ultimately withstand consolidation, markets will need to navigate the chaos of competing business and exchange design models and adapt their roles to one of the few used within the market over time, i.e. vertical hubs (facilitating the long-term exchange of information within a particular industry, like Metalsite), commodity markets (like Currenex), and procurement facilitators (for instance, catalog format, like Staples.com). Accordingly, some predict that a few large players will emerge in the B2B market, exacerbating the antitrust concerns discussed below. VII. ANTITRUST ISSUES The basic antitrust issues raised by B2Bs are familiar, as noted by the Federal Trade Commission ("FTC") Staff(31) and several commentators. The fundamental competition issues surrounding B2Bs are collusion (between competitors), exclusion (of disfavored competitors), and foreclosure in the market for markets. The first and second issues concern the markets for either the input goods being bought and sold on the B2B exchange or the market for a downstream product. The third issue concerns only the market for B2B marketplaces. This is recognized by the FTC Report, which identifies the four major B2B antitrust issues as: (1) "information sharing agreements that could facilitate coordination;" (2) "the exercise of monopsony power by large buying groups;" (3) "agreements among competitors to exclude or discriminate against rivals of a B2B's participant-owners;" and (4) "competition among marketplaces themselves which might be affected by exclusivity, either de facto through over-inclusive ownership structures or through rules or incentives that keep a B2B's participants from using or supporting a rival exchange." When the FTC or Department of Justice ("DOJ") next decides to challenge a B2B organized by competitors, all of these issues likely will be analyzed in the first instance under the general standards for joint ventures between competitors set forth in the Agencies' jointly issued Antitrust Guidelines For Collaborations Among Competitors.(32) Such competitor collaborations may be analyzed under the rule of reason when the alleged restraint is ancillary to a procompetitive integration of the parties' businesses and thus, under case law dating from the 1918 U.S. Supreme Court decision in Chicago Board of Trade v. United States,(33) are lawful absent proof that they unreasonably restrain trade. Under that standard, efficiencies need only be considered when it appears that the joint venture "has caused or is likely to cause anticompetitive harm."(34) But, as discussed in detail below, identifying the efficiencies which justify potentially anticompetitive aspects to the B2B's structure is the most effective way of determining whether a B2B faces significant antitrust risk. A. Goods Bought And Sold On The B2B
The first question that must be asked in analyzing whether a B2B information exchange might violate Section One of the Sherman Act under a rule of reason analysis(36) is whether the structure, rules, or technology of the exchange may facilitate price coordination by means of anticompetitive information sharing. The most obvious form of a potentially impermissible information exchange would be one that resulted in the signaling of price or cost information between sellers. It is also possible that buyers sharing the cost of their inputs could be accused of facilitating tacit collusion in the downstream market for finished products. The FTC Staff Report identifies five factors that may suggest heightened antitrust concerns:
The FTC Staff Report also notes that exclusivity policies may also aggravate the risk of collusion through information exchanges by permitting more reliable inferences about a competitor's behavior. Although it is not strictly necessary to analyze procompetitive reasons for a challenged business practice until anticompetitive effects have been shown, as a practical matter the basic question to be asked at the outset is: (1) What are the procompetitive reasons for a particular information exchange? Many of the efficiency attractions of B2Bs flow from information exchanges, and the Competitor Collaboration Guidelines explicitly recognize that "the sharing of information among competitors may be procompetitive and is often reasonably necessary to achieve the procompetitive benefits of certain collaborations."(42) If it is difficult, however, to articulate a cogent answer as to why that particular information exchange is necessary, there may be an increased risk of antitrust liability. For example, in U.S. v. Airline Tariff Publishing Co., the DOJ obtained a consent decree from defendant airlines which the DOJ alleged had colluded to increase prices and eliminate discounts on airfares through a computerized fare exchange system that allowed the airlines to see competitors' proposed price increases before they went into effect.(43) This risk may also be ameliorated by tailoring the type of information (and level of detail) to the particular market, as is done by FreeMarkets, which allows less information to be shared with suppliers in more concentrated markets. Risk may be further minimized by requiring participants to sign nondisclosure and confidentiality agreements, or by implementing auditing features into the B2B structure. Finally, even for aggregated data, prudence would dictate following the "safe harbor" standards set forth in the agencies' Health Care Guidelines:(44)
While monopoly power is the primary focus of antitrust enforcement, it is possible for cooperative buying to lead to monopsony issues under certain market conditions. Monopsony power occurs when a buyer or buyer group has sufficient power to reduce the sale price of goods or services below the competitive level by limiting its purchases. When B2B joint purchasing aggregates large numbers of buyers such that monopsony power becomes a legitimate concern, the danger of adopting exclusivity policies is commensurately greater. One effective check on the exercise of monopsony power is the ability of buyers to purchase outside of the group (and thereby "cheat" on the buyers' cartel). It is likely, therefore, that government enforcement agencies would carefully scrutinize a joint buying arrangement that involved either complete exclusivity or a de facto exclusivity policy, such as one that would allow a non-exclusive participant to participate in the group only on disfavored terms. As a practical matter, the Competitor Collaboration Guidelines' "safe harbor" for legitimate collaborations in which "market share . . . is less than twenty percent"(45) is a good rule of thumb for judging when joint buying arrangements may be subjected to more pointed scrutiny.
The FTC Staff has expressed a concern that "there may be circumstances under which participant-owners of the B2B could undermine competition by denying their competitors access to the B2B, or by otherwise disadvantaging those competitors in their use of the B2B."(46) If so, and the competitors' costs have been raised, there is at least a possibility of Sherman Act Section One liability. The basic issues in analyzing this potential claim are:
The test is likely to be whether the excluded firm can acquire the same inputs (or adequate substitutes) at a comparable cost through other means, either other B2B exchanges or traditional means. A highly concentrated industry with strong network effects and high barriers to entry may be the only milieu in which an excluded firm would, in fact, suffer such harm. This would still leave the question of whether this was harmful to competition as a whole or solely to a particular competitor.(47) Because efficiencies for many exchanges depend on broadening membership, rules that restrict membership will require careful explanation. Free-rider arguments for excluding rivals may or may not have force, depending on the degree to which the fees to exchange participants compensate for free riding and on the history of the exchange's policy on "open" access. Exclusion concerns are certainly greater if the B2B becomes dominant in a relevant market. For example, the Supreme Court's decision in Northwest Wholesale Stationers v. Pacific Stationery & Printing Co. held that a denial of access was subject to the rule of reason except in situations where "the cooperative possesses market power or exclusive access to an element essential to effective competition."(48) Thus, the ultimate analysis depends upon the success of other exchanges and the importance of exchanges relative to other options over time. Given the prediction of significant B2B industry consolidation, however, exclusion concerns cannot be ignored. B2B owners will need to monitor how incentives for exclusivity (for instance, equity stakes and minimum commitments) operate in the market, particularly in light of the success or failure of other exchanges. B. The Market For B2B Marketplaces The question here is whether the structure of the exchange impedes competition in the "market for markets," i.e. competition between B2Bs. This analysis will be affected by both the nature and extent of network effects in the relevant market, as well as by marketplace business practices, particularly exclusivity provisions. According to the FTC Report, competition in the market for marketplaces should be analyzed by asking the following:
In the horizontal context, an explicit or implicit agreement among competitors not to deal with a rival B2B could be viewed as an anticompetitive refusal to deal. Similarly, to the extent customers or suppliers are locked out of dealing with a particular B2B, a case can be made that this constitutes an unreasonable vertical exclusive-dealing arrangement. A particular concern is that, even assuming low barriers to entry, network effects combined with high switching costs may be sufficient to provide an anticompetitive "first mover" advantage in the form of monopoly power during the interval until a rival develops advances sufficient to overcome the advantages of the incumbent's dominant network. Equity ownership in a B2B may also raise exclusivity issues. Equity encourages use of an exchange, because the stockholders' costs of participating in the B2B are lowered. If key industry players have equity stakes in the dominant B2B, however, other exchanges may be deprived of critical mass and fall victim to network effects. If that occurs, competition from traditional marketplaces may or may not prevent market power from arising. Minimum commitments and exclusivity restrictions can raise rivals' costs. Short-term minimum commitments, however, can be justified by the costs and risks associated with establishing an exchange. There are also open questions about whether back-end efficiencies depend upon adopting proprietary technology that is incompatible with that employed by other exchanges, and whether that technological incompatibility has the practical effect of "locking" users into a single exchange. C. Additional Antitrust Issues Potentially Arising From The Operation Of B2Bs There are several additional questions that participants in B2B exchanges should ask the exchanges' operators, including: whether their firewalls(52) will be effective over time or will need to be periodically audited and/or upgraded; whether the rules of the exchange will unwittingly facilitate collusion; and whether the B2Bs' dispute resolution mechanisms have the practical result of revealing sensitive commercial information. Also, facially competition-neutral rules governing membership must be applied in an even-handed manner. Complaints from excluded rivals are a serious concern, because excluded competitors are especially likely to raise issues with the enforcement agencies or bring suit. Operators also need to examine decisions to employ "closed" technology that can exacerbate competition-reducing network effects. Adequate interoperability becomes a much greater concern when the exchange in question becomes the "dominant" player in an industry. One additional potential antitrust issue could arise from "disintermediation," a process whereby an Internet market bypasses a traditional channel in order to link buyers directly with suppliers. It is possible that the disfavored traditional distributor could attack the B2B, which excluded it from the market, as a vertical exclusive dealing arrangement. D. U.S. Enforcement Actions To Date The only U.S. enforcement agency action to date has been the FTC's investigation of Covisint, a joint venture B2B founded by General Motors, Ford, DaimlerChrysler, Nissan and Renault. On September 11, 2000, the FTC closed its investigation and terminated the HSR waiting period, with the unusual caveat that "[b]ecause Covisint is in the early stages of its development and has not yet adopted bylaws, operating rules or terms for participant access, because it is not yet operational, and in particular because it represents such a large share of the automobile market, we cannot say that implementation of the Covisint venture will not cause competitive concerns." According to an antitrust practitioner who represented Covisint before the FTC, Covisint received such quick interim approval at least in part because the founders avoided many of the potential pitfall areas completely.(53) For example, Covisint does not involve joint buying, has no exclusivity requirements and will be run as an independent company.(54) Thus, in many ways Covisint does not provide a particularly enlightening test case and leaves many interesting issues regarding monopsony, exclusion and network effects to be faced another day. E. European Union The EU Commission recently cleared MyAircraft.com, an aerospace products and services B2B launched by Honeywell, United Technologies and i2 Technologies, after a one-month probe. Interestingly, the Commission analyzed MyAircraft.com as a merger, because it was deemed to be a joint venture controlled by its parent companies. This mode of analysis may be significant in the future. If B2B exchanges are analyzed as mergers whenever the firms founding them merely establish the markets, it may place a practical limit on the number of players who can be founding partners of an EU exchange, based upon their collective market shares. Also, one of the reasons given by the EU Commission for its speedy approval was the existence of competing B2B exchanges in this industry. It is our understanding that the EU is currently conducting confidential investigations of other European B2Bs. F. The Future of U.S. Enforcement Except as previously noted, there have been no business review letters or enforcement actions. It is reasonable to expect that there will be significant scrutiny of industries that have been the subject of collusion allegations, such the airline industry and the food consortium.(55) Indeed, the original food consortium broke up in the wake of an announced DOJ probe. Other than such "suspect" industries, we can expect further scrutiny if an exchange imposes exclusivity terms combined with either joint buying or selling. The initial rules of the game have been cogently set out in the FTC Staff Report and the Competitor Collaboration Guidelines, but those rules are likely to be made concrete through business review letters or consent decrees. VIII. COUNSEL TIPS When retained to advise businesses on the formation of a new B2B, attorneys should understand their client's B2B objectives, eliminate problem areas that do not directly serve those objectives, and tailor solutions to the remaining problems around those objectives. The goal is to seek the greatest efficiencies and network effects consistent with the antitrust principles outlined above. If asked to advise a prospective B2B participant (who is not an owner or founder), counsel must take all reasonable steps to ensure that the exchange the company joins has a sound antitrust compliance policy, technologically modern firewalls, and all other features necessary to ensure that the B2B is not structured such that the client can be accused of colluding or otherwise acting anticompetitively, and that the exchange is not structured such that the client can become a victim of anticompetitive activity. Essentially the questions for either B2B formation issues or prospective participants are similar. These questions include:
IX. CONCLUSION There are significant opportunities for B2B marketplaces to provide lower costs, increased efficiencies and profitability. And while it is certainly desirable for businesses to attempt to maximize those benefits, rushing headlong into a B2B venture -- whether as a founder or a participant -- can lead to potentially serious antitrust consequences. B2B exchanges should strive to seek maximum efficiencies without raising the specter of antitrust risk, a balance that is quite possible to achieve with some forethought and awareness of the existing antitrust risks. APPENDIX A Glossary of Common B2B Terms Auctions: A type of market in which a single seller and many buyers dynamically arrive at a price. Auctions can take several forms and can be buyer-initiated (one buyer seeking bids from multiple sellers), seller-initiated (one seller seeking bids from many buyers), or two-way (many buyers and many sellers whose bidding interactions determine the market price). Source: Atlas Commerce: Glossary of B2B Terms (hereafter "Atlas Commerce") http://www.atlascommerce.com/ebusiness/glossary.html. B2B (business-to-business): Describes online transactions between one business, institution, or government agency and another. Source: Morgan Stanley Dean Witter B2B Report, Appendix III: B2B Glossary (hereafter "MSDW") http://www.msdw.com/institutional/eInterpriseSoftware/b2breport/b2b_appendix3.pdf B2B E-marketplace (Business-to-Business Electronic Marketplace): An Internet marketplace in which businesses meet to trade or negotiate with other businesses for products and services. A B2B E-marketplace creates value by reducing search costs, reducing information transfer costs, standardizing systems, and improving matching for both buyers and sellers. Buyers benefit because they have more choices and sellers benefit because they have access to more buyers. Source: theSupplyChain.com Glossary (hereafter "theSupplyChain.com") http://www.thesupplychain.com/tscm/learnmore/glossary.asp B2B enabling software: Software that enables online transactions between businesses. Differentiated from B2C (business-to-consumer) software in that the latter does not need to be able to model organizational hierarchies and enables only credit card transactions, while B2B enabling software should do so. Source: Atlas Commerce. Back-end Systems: Legacy enterprise systems that handle order processing, inventory, and receivables management for both buyers and suppliers. To deploy a digital trading platform, companies must often integrate new technologies with these older systems, which can include mainframe or ERP applications. Source: theSupplyChain.com. Bid: An offer to buy or sell a specified quantity of an item for a specified price. The person making the bid on an offering in an auction or trading exchange is known as the "Bidder." Source: theSupplyChain.com. Butterfly market: A term used to describe a competition-based exchange that involves multiple buyers, multiple sellers and a market-making intermediary, so-called because of its shape as it is usually depicted in diagrams. The focus of butterfly markets is to match buyers and sellers, creating a more efficient market by enabling participant and price transparency. Source: Atlas Commerce. Catalog: Normalizing product data from multiple vendors so it can be easily compared. Virtual distributors and content aggregators often provide this service to buyers. Most valuable when products are complex and have many attributes. Prices are set, sometimes on contract. A listing or Catalog Model creates value by aggregating suppliers and buyers. It works best in industries characterized by fragmented buyers and sellers who transact frequently for relatively small-ticket items. Given the small transaction size, it is too costly, even on the Net, to negotiate each transaction. The catalog model also works well when most purchasing takes place with prequalified suppliers and with predefined business rules, and the occasional purchase requires searching across a number of smaller suppliers. Finally, it works best for situations where demand is predictable, and prices do not fluctuate too frequently. Source: theSupplyChain.com. Catalog aggregators: Make sense of buying options by aggregating catalogs from multiple vendors with relatively static prices. Act as a neutral intermediary but help buyers make sense of multiple vendors. Also normalize information coming from diverse sources to enable comparisons of similar products and services. Typically function as virtual distributors but don't take possession of goods themselves. Collect transaction fees on purchases but can generate additional revenue via credit checks, logistics, fulfillment, insurance, or other parts of the transaction process. Must satisfy suppliers' needs for differentiation while making comparisons possible for buyers. Source: Atlas Commerce. Closed loop transaction management: E-Commerce interactions whereby the whole purchasing process from sourcing through settlement can be managed. This involves maintaining visibility over the life of the transaction, so that participants can view the current status. The enabling software must be able to maintain logical links among the individual business documents to provide this capability. Source: Atlas Commerce. Direct materials: A company's purchases typically fall into three categories: direct materials, indirect materials and capital equipment. Direct materials are purchases that are for resale or are components of a company's product and are counted as part of a company's cost of goods sold (COGS) and its inventory value is maintained on the Balance Sheet. Direct materials is the largest purchase category for manufacturers, accounting for roughly 80% of all purchase dollars. Source: Atlas Commerce. Disintermediation: When a Net market bypasses a traditional channel, directly linking buyers with suppliers; removing the middleman. The term is a popular buzzword used to describe many Internet-based businesses that use the World Wide Web to sell products directly to customers rather than going through traditional retail channels. By eliminating the middlemen, companies can sell their products cheaper and faster. Many people believe that the Internet will revolutionize the way products are bought and sold, and disintermediation is the driving force behind this revolution. Source: Webopedia, http://www.webopedia.com/ (hereinafter "webopedia"); MSDW. Domain: A designation for particular location on the Internet. A domain, for example "MerchantWorkz.com," contains files that make up the content of Web pages under that address. MerchantWorkz.com/intro.htm and MerchantWorkz.com/report3.htm are different Web pages located within the same domain. Domain names are associated with IP addresses. Source: Merchantworkz E-Commerce Glossary (hereafter "Merchantworkz") <http:// www.merchantworkz.com/glossary.asp> Download: To transfer files or data from one computer to another. To download means "to receive;" to upload means "to transmit." Source: Merchantworkz. E-commerce (Electronic Commerce): E-commerce is the buying and selling of goods and services on the Internet, especially the World Wide Web. In practice, this term and a new term, "e-business," are often used interchangeably. For online retail selling, the term e-tailing is sometimes used. Source: theSupplyChain.com. eHub: A term used by Atlas Commerce to refer to collaboration-based communities as distinct from competition-based exchanges (see Butterfly markets). eHubs may be Channel Master-dominated Private Supply Chain eHubs or Industry eHubs. eHubs differ from exchanges in the way that participants realize value. eHubs create value by increasing collaboration among a stable group of partners, whereas exchanges create value by promoting greater competition among buyers and sellers. Source: Atlas Commerce. Electronic Data Interchange (EDI): Older version of electronic commerce between buyers and suppliers; more cumbersome and costly than Net-based commerce, feasible only for large companies and their most significant trading partners. Many Netmarkets and eHubs do EDI-to-XML transactions to enable trading between large and small companies. Sources: Atlas Commerce; MSDW. Enterprise Resource Planning (ERP): Complex applications used by large enterprises to manage and integrate business processes across multiple divisions and organizational boundaries, frequently the application backbone in many large enterprises. Source: Atlas Commerce. Enterprise Relationship Management (ERM): An integrated information system that serves the "front office" departments within an organization, which are sales, marketing and customer service. Source: theSupplyChain.com. Exchanges: Two-sided marketplaces where buyers and suppliers negotiate prices, usually with a bid and ask system, and where prices move both up and down. A term used to refer to competition-based NetMarkets as distinct from eHubs. More generally, often refers to any forum that connects multiple buyers to multiple sellers. More specifically, some people reserve use of the term to refer to a stock exchange type of forum in which multiple buyers and sellers interact to discover the market price of a good. Exchanges, in this latter sense, are often held to produce the most efficient markets and most efficient form of coordinating the activities of disparate groups. In reality, this nirvana of classical microeconomics only holds for commodities where the only variables to be determined are price and quantity. Exchanges are not necessarily efficient when other variables are important. Best uses for exchanges are for spot and future markets for homogenous commodities, as channels for trading obsolete, perishable, or excess inventories, as secondary markets for trading used capital equipment, and as discovery platforms for buyers and sellers. Source: MSDW; Atlas Commerce. Extranet: Enterprise applications exposed to privileged external entities over a secure IP network. Source: Atlas Commerce. Firewall: A system designed to prevent unauthorized access to or from a private network. Firewalls can be implemented in both hardware and software, or a combination of both. Firewalls are frequently used to prevent unauthorized Internet users from accessing private networks connected to the Internet, especially intranets. All messages entering or leaving the intranet pass through the firewall, which examines each message and blocks those that do not meet the specified security criteria. Source: webopedia. Forward Auction: An auction in which bids rise in increments. Often a synonym for a seller-initiated auction. Often used synonymously with English auction, but a seller-initiated auction may include other variants such as Dutch auction. Source: Atlas Commerce. Fulfillment: Fulfillment is the process that occurs when an order is received by the entity tasked with completing the order, or the supplier. Fulfillment processes often include task such as order management, shipping management, returns and status tracking. Fulfillment could be considered the "supply-side" of the buyer/supplier relationship. Source: theSupplyChain.com. Horizontal Portal: Horizontal Portals cut across industries and automate functional processes, such as maintenance, repair, procurement, etc. They focus on providing the same functions or automating the same business process across different industries. Their expertise usually lies in a business process that is fairly horizontal, which means that it is scalable across vertical markets. Source: theSupplyChain.com. Horizontal market: An Exchange that sells materials or services that are broadly required by many industries - typically indirect materials and services. An exchange that performs a particular function that is broadly required by many industries. Source: Atlas Commerce. HTML (hypertext markup language): A set of codes that determine how a Web page will appear, including graphics, links, and text characteristics. Other code sets that build on HTML include dHTML, VRML, and XML. Source: Merchantworkz. Hubs: Electronic platform for coordinating the chain of commerce and facilitating synchronization between trading partners. Source: MSDW. Indirect materials: A company's purchases typically fall into three categories: direct materials, indirect materials and capital equipment. Indirect materials and services are expense purchases (i.e. do not count as balance sheet inventory items or assets, and can not be depreciated). For a typical manufacturing company, this category does not account for a large proportion of purchases (12-16% is typical) but may account for the bulk of a company's suppliers and involve the majority of purchase transactions. Source: Atlas Commerce. Interchange: A standard format for sharing or transferring data electronically between parties that do not share a common application. Usually a format that is platform-independent is agreed upon as a standard. Examples of common interchange formats include EDI (electronic data interchange), ASCII (American Standard Code for Information Interchange), and GIF (graphics interchange format). Source: Merchantworkz. Intermediary: Aggregates data and facilitates transactions by bringing buyers and sellers together. Internet-based intermediaries create multivendor, multiproduct marketplaces. A third party that facilitates trade between buyer and seller. An intermediary may be active or passive. Source: MSDW; Atlas Commerce. Internet commerce: A broad term covering all commercial transactional activities on the Internet. Internet commerce can range from vendors selling software from a Web storefront (Web site) to large corporate procurement systems using an Internet-based VPN (virtual private network) to deal with trading partners. Internet commerce is not synonymous with e-commerce, which covers all electronic commercial activities. Source: Merchantworkz. ISO (independent service organization): A firm or organization that offers to process online credit card transactions, usually in exchange for transaction fees or a percentage of sales. Merchants must generally establish a merchant account before contracting for ISO services, although some ISOs claim not to require separate merchant accounts. Source: Merchantworkz. ISP (Internet service provider): A firm that provides access to the Internet, including Web browsing and e-mail. ISPs often offer connections that can be accessed by dialing a telephone number through your computer's modem. Source: Merchantworkz. Legacy Systems: Systems for automating business-to-business commerce that proceeded the internet. They are also referred to as "back-end office systems" to which businesses want their B2Bs linked. Source: FTC Report § 13.1 at 2. Logistics: Logistics is officially defined as the process of planning, implementing and controlling the efficient and cost-effective flow and storage of raw materials, in-process inventory, finished goods and related information from the point of origin to the point of consumption, for the purpose of conforming to customer requirements. More simply, it is the science (and art) of ensuring that the right products reach the right place in the right quantity at the right time to satisfy customer demand. The UK Institute of Logistics and Transport defines it even more succinctly as: "the time-related positioning of resource". It has also been defined as "the management of inventory in motion and at rest." Source: theSupplyChain.com. Market: A mechanism for matching buyers and sellers of an item at a dynamically determined price. Source: MSDW. Marketplace: An Internet site that hosts one or more markets. Source: MSDW. Metamarket: A term used to refer to the seamless interconnections between exchanges and eHubs that will lead to ever-growing trade networks. Source: Atlas Commerce. MRO (Maintenance, repair, and operating equipment): Routine purchases such as office supplies, travel services, or computers needed to run a business but not central to the business's output. See horizontal market and Indirect Materials and services. MRO expenditures for a typical manufacturing company are a small proportion of total purchases (6%). Source: MSDW; Atlas Commerce. Net Market: An online intermediary that connects fragmented buyers and sellers. Net markets eliminate inefficiencies by aggregating offerings from many sellers or by matching buyers and sellers in an exchange or auction. For buyers, they lower purchasing costs while reaching new suppliers. For suppliers, they lower sales cost and reach new customers. A central hub where a trusted intermediary integrates both procedures and technology can save costs. Source: Atlas Commerce. Network: A group of interconnected computers, including the hardware and software used to connect them. Source: Merchantworkz. Network effect: Describes how all buyers and sellers benefit when a new market participant is added. The network effect produces a cycle with more buyers attracting more sellers and more sellers attracting more buyers. Robert Metcalfe created the notion that the value of a network grows by the square of the number of participants. Synonym: Metcalfe's Law. Source: Atlas Commerce. Neutral Exchange: Industry exchanges in which the owners of the exchange are not themselves participants, thus mitigating the reluctance of smaller participants. A Neutral Exchange is usually established as a dotcom business, but the difference between a neutral exchange and a sponsored exchange may decline as dotcoms offer equity to larger players to generate liquidity, and as the sponsored exchanges separate the ownership of the exchange from its management by setting it up as an independent dotcom to mitigate fears of bias. Source: Atlas Commerce. P2P (peer-to-peer): A type of network that allows two or more computers to share their resources, such as hard drives, CD-Rom drives and printers. These resources are accessible from every computer. Because peer-to-peer computers have their own hard drives that are accessible by all computers, each computer acts as both a client and a server. Peer-to-peer networks are simpler, but they usually do not offer the same performance when heavy amounts of data are being carried by the network. Many consider Napster -- the controversial system for sharing music files -- to be the epitome of peer-to-peer. Source: webopedia; @home Communications http://www.home-communications.com/peer_to_peer.htm; Planet IT http://www.planetit.com/techcenters/docs . . . vanced_ip_services/news/PIT20010302S0003. Price transparency: When both buyer and seller know market pricing or possess "perfect information." Exchanges can eliminate arbitrage situations when only a broker knows the price. Net markets can result in sellers making more money and buyers paying a lower price, since broker margins are reduced. Source: MSDW; Atlas Commerce. Procurement: Procurement is the set of activities related to generating an order on the buyer's side. Tasks such as purchase requisitions, catalog browsing, and supplier analysis are normally associated with the procurement process. The procurement process also interacts with the receiving, tracking, and other post-order tasks performed by the buyer. Source: NetMarketMakers.com. Request for Quotation (RFQ): Invitation to suppliers to bid on supplying easily described products or services needed by a company or public agency. Source: Atlas Commerce. Request for Proposals (RFP): Invitation to suppliers to bid on supplying products or services that are difficult to describe for a company or public agency. Source: Atlas Commerce. Reverse auction: A buyer-initiated auction in which a buyer invites bids from multiple sellers. The price decrements as sellers compete for the buyer's business with the lowest bid being the winner. Many large corporations may use a reverse auction as an alternative to the more traditional RFQ or RFP process, but in most reverse auctions, there are procedural variations. For example, that the buyer is not bound to accept the lowest bid, but may accept any bid, or is not bound to accept any bids. Source: Atlas Commerce. Server: The computer in a client/server architecture that supplies files or services. The computer that requests services is called the client. Source: Merchantworkz. Sticky, stickiness: The ability to retain participants. Source: Atlas Commerce. Supply Chain Management: An attempt to coordinate processes involved in producing, shipping and distributing products, generally with large suppliers. Source: MSDW. Switching costs: Costs incurred in changing suppliers or marketplaces. Net markets often seek to re-architect procurement, search, and other processes so buyers stay put, a key reason switching costs are higher in business-to-business than consumer e-commerce. Switching costs are often regarded as a bad thing, especially by buyers, but this is not necessarily the case. Higher switching costs promote greater assurance of future business to suppliers, and can produce a more trusting collaborative relationship that realizes greater benefit to both parties than could be achieved in a competitive market. Source: Atlas Commerce. URL (uniform resource locator): An address for a file (or page) located on the Internet, usually the Web. Example: "www.MerchantWorkz.com." Source: Merchantworkz. Virtual Private Marketplace: A private market to enable approved suppliers to bid on a large buyer's business or to enable more cost-effective transactions under negotiated terms. Can be a hosted extranet or feature a larger Net market. Source: MSDW. Web (short for World Wide Web): The entire collection of files written in HTML and similar mark-up languages available on the Internet. Clients on the Internet use their browsers to request these files from Web servers and then display them as Web pages. The Web is only a portion of the Internet; other parts include e-mail communication and FTP. Source: Merchantworkz. Web host: A Web hosting company (usually an ISP) leases server space and Web services to companies and individuals who wish to present a Web or e-commerce presence but do not wish to maintain their own servers. The servers are connected to the same fast Internet backbone as the ISP. Cost structures are determined by the amount and complexity of services offered, such as scripting tools, credit card processing, etc. Source: Merchantworkz. Webmaster: The alias or role of the person(s) responsible for the development and maintenance of one or more Web servers and/or some or all of the Web pages at a Web site. The term does not imply any particular level of skill or mastery. The Web master is often also the designer of some or all of the site's pages. Source: Merchantworkz. Web server: A computer dedicated to storing the various files that make up Web pages and the protocols needed for communicating with other computers via the Internet. Source: Merchantworkz. XML (extensible markup language): A metalanguage containing a set of rules for constructing other markup languages. With XML, people can make up their own tags, which expands the amount and kinds of information that can be provided about the data held in documents. It enables designers to create their own customized tags to provide functionality not available with HTML. For example, XML supports links that point to multiple documents, as opposed to HTML links, which can reference just one destination each. Source: Merchantworkz. Pamela Jones Harbour 1. Member of the Firm of Kaye Scholer LLP. Sincere gratitude is due to Associate Jesse Sands for his invaluable assistance in the preparation of this outline. The assistance of Associate Beth Holck is also gratefully acknowledged. This article appeared in the February 2001 issue of Internet Law & Business and in Representing the New Media Company (New York: Practicing Law Institute, 2001), pp. 649-88. 2. For the reader's convenience, a glossary of some of the most commonly used B2B terms has been compiled. That glossary can be found at the end of this article in Appendix A. 3. These are systems for automating business-to-business commerce that preceded the Internet. They are also referred to as the "back office systems" to which businesses want their B2Bs linked. Entering the 21st Century: Competition Policy in the World of B2B Electronic Marketplaces: A Report by Federal Trade Commission Staff (October 2000) (hereafter "FTC Staff Report") § B.1., at 2. 4. As noted, business-to-customer electronic marketplaces are commonly referred to as B2Cs, while business-to-government marketplaces are referred to as B2Gs. Those markets are beyond the scope of this outline. 5. A virtual market refers to collaboration-based communities as distinct from competition-based exchanges. Private virtual marketplaces enable approved suppliers to bid on a large buyer's business or enable more cost-effective transactions under negotiated terms. Source: Atlas Glossary. 6. Andersen Consulting Research Notes, "Integration is an e-Market Imperative," Issue 10 (August 3, 2000) at 1. 7. FTC Public Workshop: Competition Policy in the World of B2B Electronic Marketplaces 57 (June 29, 2000) (hereafter "FTC Workshop"). 8. Id. at 53. 9. Id. 10. Goldman Sachs Investment Research, B2B: 2B or Not 2B? (Version 1.1) (November 12, 1999) at 2, 16. 11. Id. 12. Many e-commerce standards today are based on XML (eXtensible Markup Language), which provides a flexible way to describe product specifications or business terms. Source: Atlas Glossary. 13. FTC Workshop, Teagarden at 117-18. 14. Infrastructure companies are also generically referred to as "Enablers." However, not all Enablers are infrastructure companies. Financing companies, for example, are also Enablers (e.g., Morgan Stanley Dean Witter, Internet Capital Group). "The B2B Universe Expanded" Forbes: Best of the Web, July 17, 2000, at 154-55. 15. Nikhil Hutheesing, "Enablers," Forbes: Best of the Web July 17, 2000, at 132. 16. MRO (maintenance, repair and operating equipment) refers to routine purchases such as office supplies, travel services, or computers needed to run a business but not central to the business's output. MRO expenditures for a typical manufacturing company are a small proportion of total purchases. Source: Atlas Glossary. 17. Price transparency occurs when both buyer and seller know market pricing or possess "perfect information." Because of price transparency, exchanges can eliminate arbitrage situations when only a broker knows the price. Source: Atlas Glossary. 18. The catalog model normalizes product data from multiple vendors so data can be easily compared. Content aggregators often provide this service to buyers or exchanges. This is most valuable when products are complex and have many attributes. Prices are set, sometimes on contract. Source: Atlas Glossary. 19. Auctions are sourcing methods to allow spot markets and/or contract negotiation. Auctions can take several forms and can be buyer-initiated (one buyer seeking bids from multiple sellers), seller-initiated (one seller seeking bids from many buyers), or two-way (many buyers and many sellers whose bidding interactions determine the market price). Source: Atlas Glossary. 20. A buyer-initiated auction in which a buyer invites bids from multiple sellers. Buyers post their needs for a product or service, and suppliers bid to fulfill that need. Unlike an auction, prices only move down. Many large corporations may use a reverse auction as an alternative to the more traditional RFQ or RFP process, but in most reverse auctions, there are procedural variations: for example, that the buyer is not bound to accept the lowest bid, but may accept any bid, or is not bound to accept any bids. Source: Atlas Glossary. 21. FTC Report, §1 at 10. 22. Id. at 11. 23. Id. at 14. 24. Steve Konicki, "Covisint's Rough Road," TechWebNews, August 11, 2000. 25. Bob Tedeschi, E-Commerce Report, N.Y. Times, March 26, 2001 at C4. 26. Mick Brady, No Overnight Success for B2B (July 21, 2000) http://www.ecommercetimes.com/news/articles 2000/000721-3. Reed Abelson, Pets.com Plans to Close, N. Y. Times, November 8, 2000, available at http://www.nytimes.com/2000/11/08/technology/O8PETS.html. 27. Network effects describes how all buyers and sellers benefit when a new market participant is added. The network effect produces a cycle with more buyers attracting more sellers and more sellers attracting more buyers. Source: Atlas Glossary. 28. Lori Enos, Report: B2B Shakeout Yet to Come (August 18, 2000) <http://www.ecommercetimes.com/ news/articles2000/000818-2.shtml> . 29. Designed to operate as a link between Fortune 1000 companies and minority-owned suppliers, M-Exchange is an example of an early B2B casualty. In business for only four months and never operational as an exchange, M-Exchange was selected as one of several B2Bs that participated in the FTC's Public Workshop on B2B E-commerce. Market watchers noted that the demise of M-Exchange occurred even though M-Exchange appeared to make "all the right moves" in placing early emphasis on financing, assembling management, and consulting appropriate industry managers and experts. Paul Greenberg, Minority B2B Venture Folds (July 20, 2000), available at <http://www.ecommercetimes.com/news/articles2000/000720-1.shtml> . 30. Privacy is an ongoing e-commerce concern. The FTC prevented Toysmart.com from selling its database information as an asset during bankruptcy proceedings. Moreover, forty-seven State Attorneys General filed objections to the proposed FTC settlement with Toysmart.com, alleging the FTC's agreement did not go far enough to protect consumers' privacy rights. Additionally, the EU has very strict controls on the collection and/or release of a private citizen's data. Companies located in a country which does not match or exceed the EU's high standard for privacy are precluded from receiving any customer data from any member of the EU. The U.S. does not meet the EU's high standard for private citizen data protection. 31. See FTC Staff Report §3 at 2 ("[s]uch competition issues are not new to antitrust analysis"). 32. Federal Trade Commission and Department of Justice Joint Antitrust Guidelines for Collaboration Among Competitors (April 2000) (hereafter "Competitor Collaboration Guidelines"). 33. 246 U.S. 231, 239-41 (1918) (limited restraint on off-hours commodity trading upheld where procompetitive purpose shown). 34. Competitor Collaboration Guidelines, §3.36. 35. A term used to refer to competition-based Netmarkets (an online intermediary that connects fragmented buyers and sellers)as distinct from eHubs (which create value by increasing collaboration among a stable group of partners, as opposed to Netmarkets or exchanges which create value by promoting greater competition among buyers and sellers). More generally, the term often refers to any forum that connects multiple buyers to multiple sellers. More specifically, some reserve use of the term to refer to a stock exchange type of forum in which multiple buyers and sellers interact to discover the market price of a good. Exchanges, in this latter sense, are often held to produce the most efficient markets and most efficient form of coordinating the activities of disparate groups. In reality, this nirvana of classical microeconomics only holds for commodities where the only variables to be determined are price and quantity. Exchanges are not necessarily efficient when other variables are important. Best uses for exchanges are for spot and future markets for homogenous commodities, as channels for trading obsolete, perishable, or excess inventories, as secondary markets for trading used capital equipment, and as discovery platforms for buyers and sellers. Source: Atlas Glossary. 36. The FTC Report explicitly declined to address potential per se violations, instead limiting its discussions to rule of reason issues only. 37. FTC Report §3.A.1.a. at 7. 38. Id. at 8. 39. Id. 40. Id. at 8-9. 41. Id. at 9. A follow-up question that should then be asked is whether the B2B permits faster dissemination of the information and, if so, whether that earlier disclosure has any competitive implications. 42. Competitor Collaboration Guidelines, §3.31(b). 43. 836 F. Supp. 9 (D.D.C. 1993) (approving consent decree); United States v. Airline Tariff Publishing Co., 1994-2 Trade Cas. ¶ 70,687 (D.D.C. 1994) (competitive impact statement describing allegations that the "fare dissemination system provided a forum for the airline defendants to communicate about their prices . . . they exchanged clear and concise messages setting forth the fares each wanted the others to charge, and identifying fares each wanted the others to eliminate"). 44. 1996 Dept. of Justice and Federal Trade Commission Statements of Antitrust Enforcement Policy In Health Care (August 1996), Statement 5.A. 45. Competitor Collaboration Guidelines, §4.2 at 26. 46. FTC Report, §3.A.3 at 16. 47. See, e.g., Bhan v. NME Hosps., 929 F.2d 1404, 1414 (9th Cir. 1991) (exclusion of nurse from one hospital insufficient to demonstrate actual harm to competition). 48. 472 U.S. 284, 290 (1985). 49. FTC Report §3.B.4 at 32. 50. Id. at 33. 51. Id. 52. A firewall is a system to prevent unauthorized access, by specific recipients such as competitors, to or from a private network. Firewalls can be implemented in both hardware and software, or a combination of both. All messages entering or leaving the intranet pass through the firewall, which examines each message and blocks those that do not meet the specified security criteria. Source: webopedia, http://www.webopedia.com/TERM. 53. Remarks of Janet L. McDavid, Esq., of Hogan & Hartson, LLP on Friday, October 27, 2000 at the George Mason Law Review Symposium: Defining The Role of Antitrust In the High Technology Revolution. 54. Id. 55. See Stephanie Bruzzese, "Food Consortium Highs and Lows," Line 56 (June 23, 2000). http://www.line56.com/articles/default.asp?NewsID-=999. 56. See, e.g., The Antitrust Review of the Americas 2001, Vernon E. Vig, Preliminary antitrust analysis of B2B e-commerce, at 7. 57. See FTC Staff Report at n.117 ("a minimum purchase contract sometimes has been viewed as less restrictive than a full-requirements contract"). 58. This can be a concern on two levels. First, would a B2B owned by a coalition of sellers who had access to more -- or more current -- information than non-owners be able to "frontrun" the market by anticipating buyers' needs and raising prices selectively? Id., §1.C.6 at 18. And second, does the information promote tacit price collusion, as discussed in Section VII.A.I, supra? 59. See Vig, supra n. 56 at 8. 60. Id., §1.C.7.c at 24. |