Antitrust enforcement in electronic B2B marketplaces: an application of oligopoly theory and modern evidence law.

• Author: Hertzberg, Gabriel
• Position: Business-to-business

1. INTRODUCTION: THE FTC REPORT

   In June 2000, the Federal Trade Commission held a workshop designed to educate the Commission about the emerging technology of business-to-business electronic marketplaces (B2Bs). (1) The workshop provided a forum for industry leaders, Commission staff, antitrust practitioners, and legal scholars to exchange ideas about the role B2Bs will play in changing the landscape of competitive markets. (2)

   The FTC summed its position in a report that scrutinized the commercial platforms and their potential threat to competition. (3) The report set forth the guidelines that the Commission will follow in the future when reviewing the competitive behavior of both the B2Bs and those transacting business on them. (4) The FTC concluded that the traditional legal framework is amenable to antitrust issues raised on B2Bs. (5) This Note seeks to expose a weakness in the Commission's conclusion. It posits that the challenges posed by the architecture of the B2B marketplace, combined with modern evidence rules, render traditional antitrust enforcement mechanisms impotent. Specific regulation will be required where the common law will fail.

   The second and third sections of this Note deal with identifying a B2B and discuss its most recognizable virtue: potential for leaner transactions. The fourth section examines market transparency, a potential source of difficulty for antitrust enforcers. The fifth section attempts to show how modern evidence rules, when combined with a transparent marketplace, make a B2B antitrust case extremely difficult to prosecute. The paper concludes with legislative recommendations that, once implemented, will allow courts to return to the common law's rule of reason/per se analysis. (6)

2. WHAT IS AN ELECTRONIC MARKETPLACE?

   The electronic marketplace is not a "new" system by today's dynamic standards. The Nasdaq stock market is based on an electronic platform, eBay has facilitated electronic transactions for over seven years, (7) and every major retailer has the capability to sell its wares online. (8) A platform that allows a buyer and seller to meet and transact over an electronic medium is an electronic marketplace. (9) There are business-to-consumer electronic marketplaces (B2Cs), which procure vertical transactions between a business-seller and consumer-buyer. (10) A common example of a B2C is the airlines' venture, Orbitz. (11) As consumers, our participation in B2Cs indicates that we appreciate the efficiency of these transactions: we shop from home rather than drive to the mall, we buy our airline tickets with a mouse click rather than a lengthy phone call, and today I actually ordered milk and cereal for delivery by visiting the website of my local grocery store. In the meantime I wrote this paragraph; is there better evidence that society is better off when we save time making our purchases?

   The same principle applies for commercial transactions. Less time spent finding sellers of inputs or buyers for output means lower transaction costs for businesses. Society is better off because those resources used for the transaction can be reallocated towards production. (12)

   The mechanism of the B2B electronic transaction can be demonstrated with a simple hypothetical: American Motors purchases 50,000 brake pads for its winter production line. A month before completion, it realizes it will use only 40,000. The inventory manager posts the surplus for sale on the industry B2B. Enter GermanAmerican Motors, who will fall 10,000 brake pads short. Rather than going to a supplier for a small and therefore costly order or manufacturing the pads in-house, GermanAmerican logs on to the industry B2B. It sees the pads for sale, posts a bid, and makes a purchase.

3. THE EFFICIENCIES

   B2Bs will have the most penetrating impact in the manufacturing sector, where transaction costs are unnecessarily bloated. (13) A survey conducted by the National Association of Manufacturers found that only one percent of manufacturers conduct e-commerce on their web sites and 20 percent lack web presence completely. (14) One FTC workshop participant noted that 80 percent of business to business transactions in the metals industry are performed manually, and added that the 20 percent that were considered automated were probably not bona fide. (15) The manufacturing industries lag behind other industries, such as retail, that have seen immense cost savings from e-commerce transactions. (16)

   It may be overbroad to attribute efficiencies to B2Bs as a whole because the types of B2Bs vary with great degree, and "whether ... efficiency is realized is highly fact-dependent and can turn on any number of specifics, including ... the marketplace in question." (17) The two main areas where B2Bs will differ are ownership and architecture, and each will pose issues that will affect the range of competitive outcomes.

   The ownership possibilities are vast; B2Bs may be fractionally owned by horizontal sellers, co-ventured by sellers and buyers of a set of specific inputs, or privately owned by non-participant service providers. (18) The architecture may take many forms, where the variables turn mostly on transparency of the marketplace. (19) B2B servers may disallow participants from viewing competing bids, may hide the identities behind the bids, or may allow some amount of limited disclosure, like geographic location or business size. Which type of B2B will emerge as the prevalent one will only become evident with time and is likely to be industry-determined. (20)

   1. Administrative Costs

      Administrative costs, "the costs of effecting the transaction itself," are comparatively higher in manual transactions than in a B2B transaction. (21) One FTC workshop participant, a pharmaceutical industry member, stated that a "face-to-face sales call [costs] about $575," and another industry member added that the same transaction would cost $10 on a B2B. (22) Another panelist stated that a $100 small business transaction could be reduced to $10 on a B2B. (23)

      Administrative costs include all levels of procedural protocol attending a transaction: inter-firm communication between buyer and seller; intra-firm communication among a seller's accounting, distribution, and sales arms; production of lengthy purchase documents; and a buyer's costs associated with negotiation, offer and acceptance. (24) And these costs are only those that attach to a successful transaction. The true administrative cost savings from B2B transactions occur when processing goes awry. A workshop panelist, noting the pervasiveness of human error in business to business transactions, stated that one "major retailer" with whom he does business suffers from "40 percent of all ... purchase orders [containing] errors." (25) The panelist continued, "`That means that 40 percent of [the time of] their accounting staff, their receiving staff, and their production staff is spent on ... nonvalue-added activities.'" (26)

      The panelists also commented on the labor-intensive costs associated with special orders. (27) These costs are eliminated with a B2B transaction. Every order is "special" in the sense that it is posted exactly as the buyer demands it; it is at the option of B2B member sellers as to whether to fill the order. It is theoretically inconceivable that the market will fail to provide a seller that caters to exceptional orders.

      International transactions are also performed more efficiently on B2Bs because the platform provides clarity where traditional communication gives rise to significant margins for error. (28) For example, the most significant barriers to efficient international transactions include language, business forms, product descriptions, and methods of negotiation. (29) These barriers are razed on the B2B platform, where bids and inventory can be listed in multiple languages, with user-specific translations and descriptions, and negotiations are standardized. (30) The firms that conduct their international business on a B2B are relieved of the time, labor and costs associated with such cultural differences. (31)

   2. Search Costs

      A manufacturer faces substantial transaction costs in locating a buyer for its product or a seller of its required inputs. B2B transactions may substantially decrease those costs. On the demand side, buyers have the unique opportunity to "comparison shop" on a B2B where they otherwise would peruse catalogues and gather cost information. On a B2B, a buyer sees quality and price information for many sellers on a single website. (32)

      On the supply side, B2Bs potentially expose sellers to a greater number, and more diverse group, of buyers. (33) Indeed, one panelist at the FTC's workshop, a CFO of a small steel outfit, noted that he was exposed to "50 new customers" in two months of B2B participation, "90% of whom he had never heard of before." (34) Large suppliers in particular may benefit from access to a broader class of buyers. Small buyers who previously would have evaded the radar of the larger input manufacturers will become visible. Where in traditional markets it was unprofitable for large suppliers to seek out small buyers, B2Bs may make it feasible and efficient to supply the smaller purchasers. (35) The workshop panelist from the small steel outfit supported this proposition by explaining that while he once needed to "make 20 phone calls to get one coil of steel," he now, by utilization of a B2B, can satisfy his small order from a major supplier that has what his firm needs. (36)

      The panelists stressed the potential for lower search costs in highly fragmented industries. The large number of sellers increases search costs substantially. It is in these industries where a B2B would most facilitate efficiency by bringing all parties to one marketplace. (37)

      B2Bs also provide opportunity for efficiency in highly concentrated industries by creating a platform for reverse auctions. Reverse auctions exist in...