Publications

Federal Trade Commission’s Report On Competition Policy In The World of B2B Marketplaces,

October 27, 2000

Co-Authors: Jeane A. Thomas and Monya A. Phillip.

It has been several months since the Federal Trade Commission's ("FTC") groundbreaking B2B workshop and while the rest of us have been busily trying to figure out how the FTC will evaluate B2Bs, the FTC staff has apparently been preparing a report summarizing the knowledge gained at the workshop and developing "guideposts" to assist in applying traditional antitrust analysis to electronic marketplaces. A daunting task, to say the least, but one that reinforces that current paradigm that even in this newest of new formats, the old, trustworthy antitrust rules still apply. What has become apparent, however, is that formation agreements, exclusivity provisions, and operating rules will be foremost in any government evaluation of a B2B electronic marketplace.¹

In its overview of B2B electronic marketplaces, the FTC excludes business-to-consumer commerce from the scope of its Report and explains that its working definition of B2B refers only to "transactions that occur online through the support of the Internet". The Report emphasizes that B2Bs, often lumped as if they appear in one form with one purpose, actually take many forms - currently we see catalogs, auctions, exchanges, and negotiations. Additionally, revenue is generated via transaction fees, membership or subscription fees, service fees, advertising fees, and the sale of data and information generated through the site. This last issue raises concerns regarding ownership of such information. Perhaps most importantly, however, the Report states that "while the building blocks of B2Bs are clear, the ultimate forms that B2Bs will take remains to be seen." Nevertheless, understanding these building blocks and how electronic marketplaces actually operate is fundamental to understanding what issues may arise in the competitive arena and where evolution of B2Bs will take us.

Before delving into a framework for antitrust analysis of B2B marketplaces, the FTC provides a summary of the efficiencies, known and predicted, that electronic marketplaces offer. Pulling from the comments offered by workshop participants, FTC staff opine that B2Bs can increase efficiencies by reducing administrative and search costs. Moreover, electronic B2Bs can make efficiency enhancing collaborations more readily accessible. For example, "B2Bs may facilitate collaborative conduct such as joint product design." Such increased collaboration "may enable a business to better focus upon its core competencies." While the FTC is not providing a complete list of all of the anticipated benefits of conducting business through an electronic marketplace, it does suggest in its Report that such efficiencies are important in any thorough antitrust analysis of B2Bs.

The final section of the Report focuses on the effect on competition in two main markets: the markets for goods bought and sold on B2Bs, and the market for marketplaces. Consistent with its position that "B2Bs are amenable to traditional antitrust analysis," the Report explains that information-sharing agreements among competitors, of notable concern to workshop participants as potential avenues for coordination on price or other competitive terms, are typically assessed using a "rule of reason" analysis under §1 of the Sherman Act. In so doing, B2Bs should consider five major factors: (1) the structure of the market - "the greater the degree of concentration in the market, the greater the concern about possible effects on competition"; (2) which parties are sharing information - red flags are likely to be set off if the information is being shared among competitors rather than noncompetitors; (3) the type of information being shared; (4) timeliness of information - obviously, information about future pricing will present more competitive concerns than information about past transactions; and (5) whether the information is available through sources other than the B2B.

According to the Report, exclusion from B2Bs is not a major concern, as most of the workshop participants stated that their sites were open to all willing participants. Still, exclusivity provision and rules can present competitive concerns if not carefully crafted. The analysis will focus on the market for services rendered by a B2B and whether damage to competition could arise from limiting rivals access to an electronic marketplace, as well as limiting new entrants. If harm to competition appears likely, the analysis will then turn to "whether the access denial is reasonably necessary for achieving procompetitive benefits" as balanced against the harm to competition. The Report provides the following key factors to consider when conducted analysis of the harm to competition presented by exclusionary rules or provisions: (1) whether the B2B is the only source for the product or service; (2) whether it is likely that new entrants will provide alternatives to disadvantaged rivals; (3) and whether exclusivity and lack of alternatives results in the ability of participants to raise or maintain supracompetitive prices. As well, these factors must be weighed against the efficiencies the exclusion will promote.

Although the Report notes that investigations into the competitive concerns a particular B2B may raise will be heavily fact specific, the FTC provides clear "guideposts" to illuminate the circumstances that could lead to competitive concerns. "All else held equal (including the ability to achieve efficiencies and innovations), competitive concerns are magnified (i) the greater the market share of the B2B participant-owners; (ii) the greater the restraints on participation outside the B2B; and (iii) the less the interoperability with other B2Bs." This, the Report is quick to point out, does not mean that "B2Bs are presumptively unlawful". Rather, the Report reinforces the FTC's position that electronic B2Bs may result in, among other benefits, increased innovation and significantly reduced costs. In so doing, the FTC has provided substantial guidance in reviewing sites so that they do not present competitive problems that could result in time consuming and costly government investigations. As stated in the Report "it appears likely that many potential concerns could be eliminated through well-crafted B2B operating rules." Accordingly, antitrust scrutiny at even the earliest stages of formation of an electronic B2B is paramount.

The report, “Entering the 21st Century: Competition Policy in the World of B2B Electronic Marketplaces” can be viewed by logging on to the FTC’s Website at http://www.ftc.gov/opa/2000/10/b2breport.htm.

¹ The FTC has reviewed only one B2B thus far. See Closing Letter to Covisint Founders available at http://www.ftc.gov/os/2000/09/covisintchrysler.htm. "The Commission closed its investigation of whether Covisint violated §7 of the Clayton Act but noted that because 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 because its founders represent such a large share of the automobile market, the Commission could not say that implementation of the Covisint venture will not cause competitive concern." FTC Press Release, October 26, 2000. ** The Crowell & Moring eBusiness Group represents exchanges and participants in the full range of B2B legal issues.

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Jeane A. Thomas
Partner – Washington, D.C.
Phone: +1 202.624.2877
Email: jthomas@crowell.com