B2Bs, e-commerce & the all-or-nothing deal.

• Author: Levine, Gail F.
• Position: Business-to-business

1. INTRODUCTION

   Business-to-business electronic marketplaces ("B2Bs") have been heralded as one of tle most revolutionary developments in tle business world. tlis new e-commerce phenomenon, which has recently exploded on tle business scene, allows businesses to trade witl each otler via tle Internet. (1) Largely unheard of until recently, B2B transactions are now predicted to reach $8.5 trillion by 2005. (2)

   However, tle rise of B2Bs highlights a surprising flaw in tle courts' analysis of certain buyer price-fixing agreements, an analysis tlat tends to indiscriminately view all such agreements witl disfavor. Consider how price-fixing commercial buyers may use B2Bs to save tlemselves money, save consumers money, and enhance social welfare. Imagine tlat such buyers have to purchase some key, specialized input--say, "gears"--in order for tlem to make tle product--say, "machines"--tlat tley manufacture and sell to consumers. Suppose tlat all of tlese gear buyers agree to take action against tle supracompetitive prices tlat tle gear-sellers have been charging tlem. tley form a B2B, and tlrough it, tley formulate and execute tleir strategy: tley will award tle contract for tleir pooled gear purchases to one seller only. tley invite tle sellers to vie for tleir joint purchase in a reverse auction conducted on tle B2B, an auction in which tle sellers will bid down tle total price of tle job. tlis arrangement--tle "all-or-notling" deal--can lower tle total cost of tle gears to tle machine-makers, stimulate bigger gear orders, and lower tle prices tlat consumers have to pay for machines.

   tle problem is tlat tle courts may deem tlis procompetitive deal to be a per se violation of tle federal antitrust laws. tlis is because otler big buyer price-fixing agreements--so-called oligopsony agreements, (3) in which buyers profit by agreeing to buy an anticompetitively low level of inputs (4)--are often considered per se illegal. (5) Disturbingly, courts rarely distinguish such illegal agreements from tle procompetitive all-or-notling deal. (6) Worse, because the two types of agreements are often not properly distinguished and because the possible anticompetitive effects of such B2B buyer agreements have been so well-noted, the all-or-nothing deal is at risk of becoming the proverbial baby thrown out with the bathwater.

   Although the problem is hardly limited to B2B markets, B2Bs--with their tremendous power to help buyers reach agreements on price and output--have brought the problem to the fore. Consider, for example, the wealth of commentators who have pointed out the potential evils of buyer price-fixing via B2Bs. (7) They correctly note that B2B buyers can profit from oligopsony agreements--agreements to buy an anticompetitively low level of inputs. Indeed, some raised such fears about Covisint, a B2B founded in 2000 by the "Big Three" automobile manufacturers. (8) Some were concerned that the automobile manufacturers in that B2B could have driven down the prices they would pay for inputs like anti-lock brakes or rear-view mirrors, if they jointly ordered an anticompetitively small quantity of those brakes or mirrors. (9) Moreover, if they shrunk those orders for brakes or mirrors, the car makers might have produced fewer cars, thereby possibly driving up car prices for consumers. Apparently in response to such concerns, Covisint has disavowed any intention of aggregating their buyers' purchasing power, (10) Antitrust counselors are now cautioning B2Bs that aggregate purchases to "keep in mind that antitrust enforcers will be unlikely to credit procurement cost savings that are the result of the exercise of buyer market power." (11) Yet that excess of caution exemplifies the problem. Forswearing any purchasing power aggregation means forgoing another kind of buyer agreement--the all-or-nothing deal--that can actually save consumers money. The courts' lack of a generally accepted framework for distinguishing anticompetitive oligopsony from potentially procompetitive all-or-nothing deals may well be deterring such procompetitive deals.

   This Article seeks to fill that analytical gap. It proposes a test--one demanding examination of the effect of the buyers' agreement on inputs purchased--for distinguishing anticompetitive oligopsony from the potentially procompetitive all-or-nothing deal. Having offered a test for identifying the all-or-nothing deal, this Article then advocates that all-or-nothing deals be reviewed under the rule of reason test, a more economically sensible treatment given their potentially positive economic effects. These measures may allow the all-or-nothing deal to emerge from the shadow of oligopsony and become a way for B2B buyers to save money, enhance competition, and lower prices for consumers.

   Toward that end, Part II of this Article describes the new e-commerce phenomenon of B2Bs, explaining what they are, offering a quick sketch of their history, and demonstrating how they may foster buyer agreements on price or output. Oligopsony agreements and their anticompetitive effects are described in Part III.A.; the all-or-nothing buyer agreement and its potentially procompetitive economic effects are described in Part III.B. Part IV outlines the current legal response to buyer price-fixing agreements generally and to these two types of buyer agreements in particular, and notes the lack of a generally accepted analytical framework that would help courts distinguish oligopsony from all-or-nothing agreements. Part V proposes a framework to fill that gap and urges rule of reason treatment for the all-or-nothing deal.

2. THE NEW E-COMMERCE OF B2Bs

   B2Bs are one of the latest arenas in which buyers may reach agreements, some anti-competitive and some decidedly not. Before launching into an analysis of the economic effects of B2B buyer agreements, a word about what B2Bs are, their history, and how they can foster buyer agreements is in order.

   B2Bs are virtual marketplaces that connect businesses to each other via the Internet. (12) They are software systems that allow, for example, businesses to purchase inputs from commercial suppliers using high-speed Internet communications. (13) B2Bs are as diverse as offline businesses are: (14) They can be used to trade a host of goods and services, for example, and prices may be determined in B2Bs in a wide variety of ways. (15) Online B2B catalogs can "normalize, or standardize, product data from multiple vendors so that buyers can easily compare it," (16) and sellers can shape such catalogs to reflect special arrangements reached with particular buyers. (17) Online B2B auctions--whether forward, reverse, or other--allow for online bidding among commercial buyers and sellers. (18) In online exchanges, prices can be established via negotiations between buyers and sellers, often using a bid-ask system. (19)

   Moreover, B2Bs can be owned and organized in any number of ways. Many of the original B2Bs were founded not by the buyers or sellers within the industry that the B2B served, but by third parties. (20) Since then, other B2Bs--so-called "consortium B2Bs"--have been founded by participants in the industry that the B2B serves, quite often by the buyers. (21)

   B2Bs sprang onto the business scene so explosively that by June 2000, according to some estimates, about 600 B2Bs had been announced, "scores more" were being announced daily, (22) and B2Bs were estimated to account for over 70% of the economy. (23) Indeed, the Federal Trade Commission ("FTC"), recognizing that B2Bs had the potential to reinvent global business practices, hosted a two-day workshop on B2Bs in June 2000 in order to better understand the efficiencies B2Bs could offer and to "lay the foundation for understanding how best to answer traditional antitrust questions" that B2Bs may pose. (24) The business community's enthusiasm for B2Bs and their potential efficiencies was reflected in a full-page advertisement that appeared in the New York Times in October 2000. The advertisement was sponsored by B2B software providers and touted B2Bs as a means to "eliminate bureaucracy and red tape, streamline procurement and supply chain management, and drastically cut the cost of paper and manual processing ... the result is lower transaction costs, more customers, and faster time to market." (25)

   Yet after having raised such expectations, B2Bs saw the pendulum of enthusiasm swing far to the other side. Many B2Bs failed, and survivors ran behind schedule. (26) Reasons proffered for the decline included the overall slowdown in technology spending, the overestimation of technology's ability to solve longstanding business problems rapidly, and the underestimation of the challenges in implementing technology solutions. (27) Headlines began appearing that questioned whether B2Bs were dead. As the Wall Street Journal put it, "B-to-B--R.I.P.?" (28)

   The pendulum now appears to have swung back a bit. Indeed, the Wall Street Journal recently eschewed writing a report on the "death of B-to-B," noting that in the B2B industry, ."success is far from guaranteed. But dead? Hardly. In fact, it may be a safer bet to call it The Next Big Thing." (29) One research group recently predicted that worldwide B2B transactions would reach about $5.95 trillion by 2004, down from an earlier estimate of $7.3 trillion the year before, to be sure, but still a substantial sum. (30) Moreover, the research group has concluded that in the year 2000, B2B revenues climbed 189% from the previous year. (31)

   Much of the initial enthusiasm for B2Bs--and part of their enduring appeal--is due to the impressive efficiencies they can bring to the markets that use them: more competitive prices, better quality management, and perhaps enhanced innovation. (32) Consider for example the costs of processing orders today. The buyer must prepare an order, typically in writing, over the telephone, or by email. The seller must then key that order into its system...