ANTITRUST REPORT
B2B Internet Exchanges: The Antitrust Basics
William Blumenthal
E
xchanges have a long antitrust history. Chicago Board of Trade v. United States 1
remains the classic statement of the rule of reason. Silver v. New York Stock
Exchange 2 was an important decision in the evolution of boycott law. Gamco, Inc.
v. Providence Fruit & Produce Building, Inc. ,3 now largely forgotten, was for years
a leading statement of the essential facilities doctrine. In the electronic era,
automated clearing houses in banking,4 multiple listing services in real estate,5
computerized reservation systems in airlines,6 and, most recently, Nasdaq7 have
all been the subject of antitrust enforcement actions.
Significantly, none of the actions has challenged the legality of the exchange
itself. All relate to operating rules or other collateral restraints governing the
particulars of operation of the exchange — access standards, pricing rules,
trading hour limitations, and similar details.
The antitrust issues posed by exchanges are again erupting with the rapid,
almost faddish proliferation of Internet-based business-to-business (in modern
jargon, B2B) networks. During the first few months of 2000, the business press
virtually every day has carried a report of the development of another site, most
often for industry-specific inputs. Prominent examples from February and
March alone include efforts among participants in the aeronautics, automobiles,
farming, consumer products, paper, medical products, and retailing industries
to develop Internet-based exchanges for the supply of inputs.8 The participantcontrolled networks have lagged (and to some degree responded to) entrepreneurial efforts to develop proprietary networks serving a wide range of
industries.9
As the initial euphoria accompanying the announcement of the sites has
subsided, the recognition of potential antitrust issues has taken a more central
W ILLIAM B LUMENTHAL , a member of the Board of Editors of ANTITRUST REPORT , is a
partner in the Washington, D.C., office of King & Spalding. He thanks Kathryn E. Walsh
for research assistance and David A. Balto and Peter C. Fleming for valuable comments
on earlier drafts of this article.
[ 34 ]
MAY
2000
role. The recognition is not subtle — it has even found its way into headlines of
stories addressing the hurdles in moving the intended sites from aspiration to
operation.10 Noting that the Federal Trade Commission is reviewing the
automotive industry’s participant-controlled site “to determine if the structure
lends itself to unlawful price signaling or coordination among buyers or sellers,”
the Wall Street Journal states that “the mere hint of FTC concern could cause
other industry exchanges to put their plans on hold to see what, if anything, the
FTC says.”11
This article summarizes the key issues that are likely to arise in connection
with the antitrust evaluation of the new Internet business exchanges. Part I
provides background on the exchanges themselves and on the guidEnforcement agencies have challenged
ance that government enforcement
operating rules of exchanges, but not the
authorities have thus far provided on
legality of the exchanges themselves.
the exchanges. Part II addresses the
antitrust considerations relating to
the formation of the exchanges. Part III addresses the antitrust issues arising
from the types of collateral restraints that might govern the operation of
particular exchanges. These operational matters include the transparency of
competitive information, auction rules and exchange fees, and limitations on
participation through denials of access or requirements of exclusivity.
I
BACKGROUND
A. About the exchanges
Internet business exchanges are variously known as B2B exchanges, B2B
Web sites, b-webs, Internet trading hubs, and virtual marketplaces. Nomenclature aside, all of these terms refer to the same general concept — “a distinct
system of suppliers, distributors, commerce services providers, infrastructure
providers and customers that use the Internet for communications and
transactions.”12 Basically, the sites provide an electronic marketplace, in which
buyers and sellers meet to transact goods and services. The particulars of the
marketplace will vary from site to site; but many of the sites (and probably most)
are structured as some form of auction, in which sellers will bid against one
another to provide a specified input used by the buyer.
The principal benefit of the sites is the likelihood of substantial reduction in
transaction costs. Finding potential suppliers, managing the bid process across
[ 35 ]
ANTITRUST REPORT
suppliers, structuring contracts with suppliers, and coordinating deliveries by
suppliers all require resource commitments by the procurement units of
industrial buyers. If cheap, rapid electronics can successfully supplant a system
based on paper and human contact, those resource commitments can be scaled
back. The numbers are big. A press account describing one of the announced
sites reported the following:
General Motors, Ford and DaimlerChrysler … hope to move all their business,
involving more than $250 billion and 60,000 suppliers, to the Internet. The
exchange’s earliest benefits are straightforward. It will replace a bloated
procurement process built on phone calls and fax machines. GM, for example,
issues more than 100,000 purchase orders a year, with an average processing
cost of $125.13
The new sites can be viewed as lineal descendants of electronic data
interchange arrangements that have been emerging since the mid-1980s.
Recognizing the potential to reduce transaction costs through so-called EDI,
many industries have adopted electronic protocols to govern trade in inputs.
The protocols, which in some instances have been adopted as technical
standards by the International Organization for Standardization (“ISO”),14
generally relate to the formatting of electronic transaction documents (e.g.,
purchase orders and invoices) transmitted between a supplier and its customer.
The new sites go further in several respects — (a) by adopting Internet protocols,
rather than the older technology that typified earlier EDI efforts, (b) by linking
multiple suppliers with multiple customers at the site, and (c) in many instances
by adding an auction component.
The first wave of Internet business exchanges began in 1994, with a
consortium among high-tech companies to promote business-to-business use of
the Internet.15 Through 1999, most of the exchanges were developed by
entrepreneurs, who saw a business opportunity in the form of proprietary online
marketplaces that would function as intermediaries at which buyers and sellers
could transact business on a fee-for-service basis. More than 600 such ventures
have emerged to date.16 Whether any of the proprietary sites will ripen into
genuine exchanges or viable business operations remains speculative.17
The first half of 2000 has seen another wave involving a different type of site,
organized by the buyers and, in some instances, by the sellers as well. Basically,
the parties to the transaction are seeking to eliminate the middleman. These
participant-controlled sites have been the principal focus of the recent headlines
[ 36 ]
MAY
2000
addressing B2B exchanges. They have also been the focus of expressions of
potential antitrust concern and, in some instances, the subjects of government
investigation.18
B. About pertinent guidance from the enforcement agencies
In light of the obvious potential benefits from B2B sites, the FTC and U.S.
Department of Justice have taken care not to voice undue discouragement. Their
guidance to date, however, necessarily has been preliminary, with the agencies
taking caution in their statements until they have developed a better understanding of the sites.19 The most comprehensive statement has been in the form
of a speech delivered by an FTC official at the ABA Antitrust Section Spring
Meeting in April. The speech has not been published; it is recounted in detail in
a Washington-based antitrust newsletter,20 which indicates that the speech
addressed
five questions antitrust enforcers would ask …
: (1) what are the efficiencies that
the joint auction site seeks to achieve? (2) is it too large? (3) are there any
exclusionary rules? (4) are there sufficient protections to prevent collusion
among either buyers or sellers? and (5) could the buyer auction lead to the
21
exercise of monopsony power?
Also relevant, although more dated and not focused specifically on B2B
exchanges, are a speech and article by a former FTC bureau director with respect
to horizontal coordination in cyberspace.22
Some press reports have mistakenly stated that the Antitrust Guidelines for
Collaborations Among Competitors,23 issued in final form by the agencies in
early April, were spurred by B2B concerns.24 Although the principles expressed
in the Competitor Collaboration Guidelines are relevant to Internet exchanges,
the agencies had been working on the Guidelines for years, and the final
Guidelines are largely unchanged from an October 1999 draft that predated any
serious consideration of the issues posed by B2B sites. More significantly, the
Guidelines are phrased with such generality and ambiguity as to offer little
practical guidance on the particular issues arising from B2B sites.25
Ironically, the government guidelines that may be most closely tailored to
the issues of Internet exchanges are more than a generation old — the U.S.
Department of Justice 1977 Antitrust Guide for International Operations.26
Notwithstanding its nominal topic, the Guide took positions on a wide range of
policy issues, including the basic mode of analysis governing joint ventures. The
[ 37 ]
ANTITRUST REPORT
discussion was substantially informed by the matters that the Department was
addressing during the 1970s, at the birth of an earlier generation of electronic
commerce. A challenge to exclusionary practices of automated clearing houses
in banking was underway.27 The Department had just completed a policy
statement with respect to sharing of an early form of automated teller machines
for the National Commission on Electronic Fund Transfers.28 It had completed
a business review of the interbank network that became Visa,29 and it was
nearing completion of a business review of a proposed interbank electronic
switching arrangement in Nebraska.30 Against this backdrop, the Department
offered the following guidance:
The antitrust inquiry into the legality of a particular joint venture generally
involves three major issues. The first is whether the
creation of the joint venture
itself unreasonably restrains competition. The second is whether the joint
venture has any unreasonable collateral restraints that must be struck down
even if the venture is allowed. The third is whether the joint venture is in
essence a “bottleneckmonopoly” which is so important to those in the business
31
that it must be opened to all on reasonable and nondiscriminatory terms.
Elsewhere in the Guide the Department expressed a position relevant to the
second issue:
Terms of an agreement may be permitted, despite the fact that they restrict
some competition, provided that the restriction is clearlyancillary to some
legitimate purpose and is appropriately limited in scope. Stated more broadly,
the antitrust concern is very often not so much with the
particular form of a
transaction,but its surrounding circumstances. . . . First, is it an anticompetitive
restraint which is ancillary to the lawful main purpose? Second, is its scope or
duration greater than necessary to achieve that purpose? Thirdly, is it otherwise
32
reasonable, either alone or in conjunction with other circumstances?
The Guide was revised and reissued in 1988; the Department used different
terminology, but adopted a substantially similar framework.33 The 1988 version,
in turn, was withdrawn in part in 1992 and in whole in 1995, when it was
replaced by guidelines issued jointly by the Department and the FTC and
limited to jurisdictional and transnational issues.34
The other government guidelines that most directly address the types of
issues applicable to Internet exchanges are the Statements of Antitrust
Enforcement Policy in Health Care.35 Although obviously focused on a very
[ 38 ]
MAY
2000
different class of economic activity, the Statements provide important elaboration on the general principles articulated in the International Guide. Among
other institutional specifics that they address, the Statements speak to dissemination of fee and non-fee information to purchasers, exchange of price and cost
information among providers, joint purchasing, and appointment of a common
messenger to communicate with purchasers.36
The application of the various legal standards to Internet exchanges yields
conclusions that are consistent with the historical outcomes in the exchange
cases with which we began — namely, that the mere creation of an Internet
exchange will seldom face significant antitrust impediments, but the specification of the operating details will pose issues galore. As historically has been the
case with health care networks, participant-controlled exchanges are likely to
face greater exposure and legal complexity in their operating rules than are
independently controlled, proprietary sites. We consider the issues in turn.
II
FORMATION ISSUES
As a general proposition, exchanges represent a classic form of joint venture.
They are one of the oldest forms. They provide the inspiration for one of the
standard illustrations of what can constitute a joint venture (as distinct from
cartel)— a collective enterprise that makes a market. They typically provide
efficiency benefits by reducing search costs and other transaction costs. When
they are rendered in electronic form, they offer the potential for reducing
transaction costs massively.37
There should be no question, then, that an Internet exchange is an arrangement of a type that should be presumptively lawful, in the sense that the mere
decision by participants to create the exchange (leaving aside operational
restraints) should be permissible in the absence of proof of an adverse
competitive effect. In the evaluation of possible adverse effects, the principal
concern at the formation stage will be overbreadth. This, in essence, is the
second question in the recounting of the FTC’s April speech — is the site too
large?38
In addressing this concern with respect to Internet exchanges in particular,
one should be mindful of several important distinctions, some of which begin
to shade into operational aspects.
[ 39 ]
ANTITRUST REPORT
First, is the exchange purely a forum in which independent decision makers
on the buy and sell sides will interact with one another, or will it entail collective
action on either the buy side or the sell side? A forum is considerably safer than
a joint buying or selling arrangement,
and it will be evaluated by reference to
Collateral restraints can affect the
different standards. Some of the concern
analysis of the scope of the exchange.
expressed by the enforcement agencies
The reverse is true as well.
to date with respect to B2B exchanges is
predicated on the possibility that the
exchanges might be structured as joint buying arrangements,39 in which the
controlling participants plan to make collective purchase decisions. If this were
the case, the agencies would evaluate the arrangement by reference to their
standards for joint purchasing. Those standards are most fully defined in the
Health Care Statements, where the agencies provide:
The Agencies will not challenge, absent extraordinary circumstances, any joint
purchasingarrangement among health care providers where two conditions are
present: (1) the purchases account for less than 35 percent of the total sales of
the purchased product or service in the relevant market; and (2) the cost of the
products or services purchased jointly accounts for less than 20 percent of the
total revenues from all products or services sold by each competing participant
40
in the joint purchasing arrangement.
To the extent that the exchange does not involve joint purchasing, the agencies’
enforcement standards are almost certain to be more permissive, and broader
participation is likely to be cleared.
Second, will the exchange involve significant collateral restraints such as
exclusivity or transparency? These collateral restraints may present issues of
their own, as we will see shortly; but we address them in connection with
formation analysis for a more limited purpose — there will typically be an
inverse relationship between the permitted scope of the exchange and the
permitted strength of the collateral restraints. If the collateral restraints are
minimal in both contract and practice, a broader exchange should be permissible. In the extreme case, if the exchange were structured so as to be limited to
private bilateral contracting without disclosure of prices, quantities, or other
material terms and if the parties were free to use other sites or contracting
mechanisms, universal participation might well be defensible. By contrast, if the
exchange provided for complete transparency and if participants agreed to use
[ 40 ]
MAY
2000
the exchange exclusively, prudence would dictate limiting the scope of
participation in the exchange.
Third, insofar as market share matters, one needs to take care to measure it
properly. The markets that matter for purposes of formation analysis are the
products or services transacted over the exchange. For sellers on the exchange,
this is the commonplace measurement of market share. But for buyers on the
exchange, one should be looking to their share of purchases of the input. Even
if the buyers (say, all the manufacturers of industrial widgets) were dominant
in their primary business, they might account for a small share of products (say,
office supplies or electric power) bought on the exchange. (Their share in their
primary business, however, would still matter for purposes of spill-over analysis
conducted during the evaluation of collateral restraints.)
III
COLLATERAL RESTRAINTS ISSUES
We have already seen that collateral restraints can affect the analysis of the
scope of the exchange. The reverse is true, as well. In the evaluation of the
legality of particular collateral restraints, market power usually matters. This
means that a broad venture— one with high share or widespread participation— faces greater exposure. A collateral restraint that might be permissible if
imposed by a small, weak venture might be illegal if imposed by a strong,
universal venture. And a collateral restraint that is lawful when the venture is
a fledgling might ripen into illegality as the venture matures into a position of
strength.41 Some have postulated that B2B exchanges may be characterized by
network externalities;42 if this is correct, certain exchanges could become
dominant within their respective industries and could, at that time, be
compelled to modify their mode of operation.
When exchanges encounter antitrust difficulty, the cause almost invariably
is an overly restrictive collateral restraint. The potential sources of trouble are
many. We catalogue the important ones below.
A. Transparency, facilitating practices, and spillover effects
Effects from price transparency
The primary concern that the enforcement agencies have articulated to date
with respect to B2B sites is that the sites will enhance the feasibility of price
signaling and other “facilitating practices” that foster anticompetitive coordina[ 41 ]
ANTITRUST REPORT
tion. The concern largely reflects the agencies’ experience in the computerized
reservation systems case,43 where the airline participants were alleged to have
used fare designators and advance announcement of fare changes to stabilize
pricing.
The concern has validity, but its implications for policy are open to debate.
The effect of widespread disclosure of pricing information is ambiguous. As the
FTC has noted, “rapid, costless, and extensive exchange of information among
sellers” can increase the ease by
which the sellers tacitly coordinate
The primary concern that the enforcement
price and monitor compliance.44
agencies have articulated to date is that B2B
At the same time, under certain
sites will enhance the feasibility of price
conditions, transparency can ensignaling and other “facilitating practices”
hance overall market efficiency
that foster anticompetitive coordination.
and improve competitiveness.45
Through the dissemination of information, virtually all markets move towards price equilibrium — one of the
classic definitions of a market is a grouping “within which prices tend towards
equality”46; and as Alfred Marshall wrote in 1920, “the more nearly perfect a
market is, the stronger is the tendency for the same price to be paid for the same
thing at the same time in all parts of the market.”47 For any particular instance
of transparency, the questions are whether it alters the process by which
equilibrium is reached (it usually does) and whether it affects the level of the
equilibrium (it may, but one cannot a priori say in which direction).
Whether transparency concerns are implicated by any particular B2B site
depends largely on the site’s operating rules. An exchange can be structured
with appropriate firewalls, so that information is contained to those parties with
a legitimate need to know. A buyer’s bid request, for example, could be made
available to potential suppliers, but not to other buyers; and the suppliers’
respective offers could be made available to the buyer who had issued the
request and to no one else. At the other extreme, all bid requests and all
responsive offers could be publicly posted for review by all participants on the
exchange. The latter structure obviously is more transparent and raises greater
concern than the former.
Other rules of the site may also be relevant. Will information be displayed
immediately, for example, or will lags be built in? Will identities of market
players be disclosed, or will information be displayed anonymously? Will
information be displayed in disaggregated form, or will the site compile and
[ 42 ]
MAY
2000
display summary statistics? Depending on the particulars of the site, all of these
considerations may affect the analysis of transparency.
The industry context in which the site operates is also relevant. Is the
industry concentrated or atomistic? Is its structure one that is susceptible to
oligopolistic coordination and strategic behavior? In an atomistic setting,
transparency often enhances the operation of the market. In most cases in which
transparency has presented antitrust concerns, the industries have been
concentrated.
For additional insight into the agencies’ likely views on transparency-related
spillovers, guidance can be gleaned from several provisions of the Health Care
Statements. The guidance is imperfect, however, because the Statements do not
translate neatly or directly to B2B exchanges. Addressing health care providers’
collective provision of fee-related information to purchasers of health care
services, the Statements carve out a safe harbor when three conditions are all
satisfied:
(1) the collection is managed by a third party (e.g., a purchaser, government
agency, health care consultant, academic institution, or trade association);
(2) although current fee-related information may be provided to purchasers,
any information that is shared among or is available to the competing
providers furnishing the data must be more than three months old; and
(3) for any information that is available to the providers furnishing the data,
there are at least five providers reporting data upon which each disseminated statistic is based, no individual provider’s data may represent more
than 25 percent on a weighted basis of that statistic, and any information
disseminatedmust be sufficiently aggregated such that it would not allow
48
recipients to identify the prices charged by any individual provider.
Arrangements outside the safe harbor are not necessarily unlawful under the
Statements, but are subject to closer scrutiny.49
Elsewhere, the Statements address a class of transactions known as
“messenger model arrangements,” by which competing providers can convey
price information to purchasers. Noting that arrangements are not per se illegal
when they “are designed simply to minimize the costs associated with the
contracting process, and that do not result in a collective determination by the
competing network providers on prices or price-related terms,”50 the Statements
explain:
[ 43 ]
ANTITRUST REPORT
Messenger models can be organized and operate in a variety of ways. For
example, network providers may use an agent or third party to convey to
purchasers information obtained individually from the providers about the
prices or price-related terms that the providers are willing to accept. In some
cases, the agent may convey to the providers all contract offers made by
purchasers, and each provider then makes an independent, unilateral decision
to accept or reject the contract offers. In others, the agent may have received
from individual providers some authority to accept contract offers on their
behalf. The agent also may help providers understand the contracts offered, for
example by providing objective or empirical information about the terms of an
offer (such as a comparison of the offered terms to other contracts agreed to by
network participants).
The key issue in any messenger model arrangement is whether the
arrangement creates or facilitates an agreement among competitors on prices
or price-related terms. Determining whether there is such an agreement is a
question of fact in each case. The Agencies will examine whether the agent
facilitates collective decision-making by network providers, rather than
independent, unilateral, decisions. In particular, the Agencies will examine
whether the agent coordinates the providers’ responses to a particular proposal,
disseminates to network providers the views or intentions of other network
providers as to the proposal, expresses an opinion on the terms offered,
collectively negotiates for the providers, or decides whether or not to convey
an offer based on the agent’s judgment about the attractiveness of the prices or
price-relatedterms. If the agent engages in such activities, the arrangement may
51
amount to a per se illegal price-fixing scheme.
Addressing the information that the messenger/agent may disclose, a footnote
in the Statement refers to the discussion of collective provision of fee-related
information.52
How these standards will be applied to B2B exchanges remains uncertain.
An exchange can readily be structured to operate as or through a third-party
messenger. The analytical problem comes with the speed and ease of information transmission in an e-commerce world — extensive, real time, disaggregated,
unblinded information is likely to become widely available. To limit the
dissemination is likely to compromise the operational benefits of the exchanges
and to reduce the potential efficiencies. Striking the proper balance between
adverse effects from transparency and the loss of efficiency presents the
challenge for public policy.
[ 44 ]
MAY
2000
Effects from nonprice transparency
The concerns with transparency are not limited to pricing. Other competitively sensitive information could potentially be revealed in the bid process,
depending on the particulars of the site’s rules. Disclosure of the quantity to be
purchased, for example, could provide competitors with advance information
about the buyer’s intended production run. The specifications of the item to be
purchased might signal shifts in the design of the product that the buyer is
bringing to market. In most instances buyers will want to protect this information from their competitors and will assure that this information is not disclosed.
Presumably the operating rules of the site will be designed accordingly. One
cannot, however, rule out the possibility that some industries might develop a
practice of broader disclosures, with corresponding effects on the nature and
vigor of competition.
A close reading of the Health Care Statements suggests that the agencies
view nonprice transparency as generally presenting less competitive exposure
than price transparency. Addressing health care providers’ collective provision
of non-fee-related information to purchasers of health care services, the
Statements carve out a safe harbor with language that is less hedged than the
conditions imposed for fee-related information.53 It is clear, though, that the
Statements are focused on information such as medical outcome data and
practice protocols. Nonprice information of greater commercial sensitivity, such
as quantity data and strategic information, poses greater antitrust risk.
B. Agreements on pricing
The preceding discussion of transparency reflects the primary concern that
the agencies have voiced to date with respect to B2B exchanges, namely, the
potential that the mere disclosure of information will facilitate anticompetitive
coordination. The adverse effects do not require any express agreement on
competitive terms. The effects may be viewed as arising from either (1) tacit
agreement reached through unilateral, strategic action in the face of enhanced
information or (2) express agreement on the disclosure of information, as distinct
from agreement on the terms. The exchanges, however, also present potential
antitrust issues arising from express agreement on prices or other competitive
terms. We address those issues below.
[ 45 ]
ANTITRUST REPORT
Express agreement among buyers or sellers on prices of goods and services
transacted on the exchange
Most B2B sites announced to date do not involve joint decisions among
buyers or sellers as to price; the price on the particular transaction will be set
through electronic communication between the individual buyer and the
individual seller. A smaller number of sites, however, may involve a joint
buying arrangement, in which buyers coordinate the purchase prices they are
willing to pay. A smaller number yet may involve a joint selling arrangement,
in which competing sellers appoint the site as a common pricing agent54 or
otherwise coordinate the selling prices they are prepared to charge. Such joint
buying and selling arrangements involve an express agreement among
competitors as to price, and they therefore face greater antitrust exposure than
mere exchanges.
As between joint buying and joint
selling, joint buying is materially less
Standardizing auction terms and
risky. Outside of the electronic realm,
specifying auction mechanics
purchasing cooperatives have become
potentially pose antitrust concerns.
commonplace. If properly structured,
they seldom confront serious difficulties
before the antitrust enforcement agencies55 or the courts.56 We have already
quoted the provisions by which the Health Care Statements create a safe harbor
for certain joint purchasing arrangements.57
Joint selling is considerably more perilous, for the line between permissible
collective action activity and unlawful cartelization is not always clear.58 The
principal distinction between the two relates to integration and efficiency— collective price determination among competitors is permissible when
it is ancillary to an efficiency-enhancing integration, such as an arrangement in
which the competitors create a new product 59 or share financial risk.60 Where
those conditions are not satisfied, the burden falls on the coordinating
competitors to demonstrate an efficiency or other legitimate business justification for the elimination of competition. The agencies’ Competitor Collaboration
Guidelines,61 while not expressly opposed to joint selling, are inhospitable.62
Where a B2B site does nothing more than allow for joint electronic selling of
products that the participating competitors previously sold independently,
without complementarities such as new product bundles and without participants’ taking significant economic interests in each other’s sales, it is questionable as to whether the legality of collective price determination can be sustained.
[ 46 ]
MAY
2000
In light of the potential exposures, any site that contemplates collective price
determination by participating sellers should be carefully scrutinized by counsel.
Auction rules
The exchange will need to define the rules by which its auctions are
conducted. Doing so will pose two antitrust concerns.
First, the exchange may wish to limit the number of variables that will be
open to competitive bid during the auction. That is, in order to allow for a more
efficient auction process, the exchange may wish to standardize a number of
factors that might otherwise be open to negotiation — terms governing delivery,
for example, or credit or risk of loss. To the extent that the standardization is the
product of agreement among competing participants on the exchange, it raises
issues under Catalano, Inc. v. Target Sales, Inc. ,63 in which the Supreme Court held
that a conspiracy among competing wholesalers to standardize credit terms
offered to a purchaser was per se illegal because “credit terms must be
characterized as an inseparable part of the price. An agreement to terminate the
practice of giving credit is thus tantamount to an agreement to eliminate
discounts … .”64 Catalano, of course, is fundamentally different from an
exchange, in that its fact pattern involved a naked restraint. Standardizing the
rules of an exchange in good faith would more properly be analyzed as an
ancillary restraint, subject to rule of reason treatment under the classic logic of
Chicago Board of Trade 65 — the “true test of legality is whether the restraint
imposed is such as merely regulates and perhaps thereby promotes competition
or whether it is such as may suppress and even destroy competition.”66
Second, the institutional mechanics of the auction itself are potentially
problematic. Will the auction be single stage or multiple stage? If multiple stage,
will it proceed from bottom up or top down? Will the transaction be priced at the
winning bidder’s bid or at the second-place bid?67 While the specifics of auction
design generally will not be of paramount antitrust significance, their relevance
cannot be excluded. One of the issues in the Nasdaq litigation, for example, was
the minimum step value by which successive bids were required to increase or
decrease.68 In explaining the basis for government challenge to certain Nasdaq
practices, the Department wrote:
The Complaint alleges that the twenty-four market making firms named in the
Complaintand others, through the adherence to and enforcement of a “quoting
convention,” inflated the “inside spread” of certain stocks quoted on The
[ 47 ]
ANTITRUST REPORT
Nasdaq Stock Market, Inc. . . . (The inside spread is the difference between the
best price to buy stock being quoted by any market maker and the best price to
sell stock being quoted by any market maker.) As a result, according to the
Complaint, investors would have been required to pay more to buy and sell
such stocks that [sic] they would have in a competitive market.
Under the quoting convention, market makers are required to quote prices
at which they are willing to buy and sell stocks in even-eighth amounts (25
cents) rather than odd-eighth amounts(12.5 cents), whenever their individual
“dealer spreads” are 75 cents or more per share. (A “dealer spread” is the
difference between the price at which an individual market maker offers to buy
a stock and the price at which it offers to sell the same stock, on a per share
basis.) A narrower dealer spread increases the financial risk of trading stock
and, in some instances, the convention operated to deter a trader from
improving his or her quote by an eighth of a point, when the trader would have
69
been willing to do so, absent the convention.
Pricing of exchange services
The exchange will have costs. Depending on the strategic purpose of the
exchange, its promoters might also want to earn a profit. In either case, the
exchange will need a source of revenue. As a legitimate joint venture, the exchange will be legally entitled to set a fee for its services. To the extent that the
exchange seeks to regulate the fees charged between its participants for
exchange-related activities, however, it will potentially implicate a series of cases
that govern pricing among network participants.70 One commentary also posits
that a “decision by a group of B2B sellers to charge higher transaction fees to
raise the cost of competing sellers could be unlawful.”71
C. Limits on participation
Access
With the flood of Internet business sites, all embryonic and potentially
unsuccessful, it might seem premature to address antitrust issues arising from
a would-be participant’s inability to access a particular site. Access disputes,
however, have proven over time to be the most frequently recurring issue to face
competitor-controlled networks. Independent B2B exchanges do not face similar
exposure — an individual proprietor is entitled to make a unilateral decision with
whom to deal, except in extreme circumstances.72 Participant-controlled
exchanges have some flexibility, but it is not so great.
[ 48 ]
MAY
2000
The provision of access is governed by Northwest Wholesale Stationers v.
Pacific Stationery & Printing Co. ,73 which held that denial of access is permissible
except where “the cooperative possesses market power or exclusive access to
an element essential to effective competition.”74 The plaintiff in Northwest
Wholesale had challenged its expulsion from a wholesale purchasing cooperative
without explanation, notice, or hearing. Relying on Silver v. New York Stock
Exchange ,75 which had held expulsion from the Exchange without procedural
safeguards to be a per se unlawful group boycott, the Ninth Circuit held for the
plaintiff. The Supreme Court reversed on grounds that Silver was inapplicable
because the wholesale purchasing cooperative, unlike the Exchange, lacked
market power. For the immediate future, as B2B sites remain in their early
stages, access limitations undertaken for legitimate business purposes are likely
to be viewed as permissible. If a particular site develops a significant presence,
denial of access may become problematic.
The exposure associated with a denial of access may depend on the
particulars of the exchange’s access rules. Consider two alternative mechanisms
by which a participant-controlled exchange might grant access. Under the first
approach, a “Membership Committee” (initially composed of the founding
participants) determines which other traders will be allowed to participate.
Under the second approach, any participating buyer (supplier), once admitted,
is entitled to sponsor the membership of any supplier (buyer) with which it
wishes to deal. Depending on circumstances, the first approach may be
defensible, but the second will be safer.
Exclusivity and bypass
So long as the exchange is small and powerless and has a legitimate interest
in building volume, it generally will be permitted to impose exclusivity
requirements on its participants. As a component of exclusivity, the exchange
generally will be permitted to require that participants, once introduced by the
exchange, will not engage in bypass (through direct links or the formation of a
sub-network) in order to avoid exchange fees. The Health Care Statements again
are instructive: they carve out a safe harbor for exclusivity requirements in
networks so long as participation is limited.76 One commentary, however,
cautions that “the findings of fact in United States v. Microsoft suggest that, in the
presence of apparent network effects, antitrust enforcers and some judges can
be very, very sensitive to the competitive impact of arguably exclusive
obligations.”77
[ 49 ]
ANTITRUST REPORT
Exclusivity issues are important in three respects. First, as discussed in
connection with formation, exclusivity requirements may be at cross-purposes
with a desire to achieve greater universality in participation. Depending on their
business model, promoters of new exchanges may wish to achieve both broad
participation and active use by participants, where the level of activity is
probably linked to exclusivity. Although breadth and exclusivity may be
defensible at the startup stage, antitrust risk will still be present and promoters
may need to sacrifice either breadth or exclusivity if they seek to avoid risk.
Second, exclusivity may affect the likelihood that an alternative exchange
will develop in the same industry. The causal link, though, is not clear. Perhaps
exclusivity will allow the realization of the network externalities that yield a
dominant network in the particular industry. At the same time, exclusivity, if
coupled with limited participation, might force nonparticipants to develop a
competing exchange. Many antitrust counsel would suggest that the development of a competing exchange would be desirable — not so much because we are
bound to defend the legitimacy of a competitive model, as because the market
power associated with being a dominant industry exchange will limit the
exchange’s operating flexibility in the future.
Third, exclusivity is related to the analysis of transparency and spillover. If
all transactions of a particular type must be channeled through the exchange,
transparency is likely to be a greater source of concern. If only some transactions
are processed over the exchange, such that other activity may be occurring at
different prices, competitors can take less comfort in the information that they
receive through exchange disclosures.
IV
CONCLUSION
Internet business exchanges, like generations of older-technology exchanges
before them, pose antitrust issues. The issues are manageable. Although the
courts and enforcement agencies have yet to develop authority that addresses
B2B exchanges in particular, one can draw guidance from an extensive body of
law that addresses more traditional exchanges and other forms of competitor
collaboration. Because exchanges offer important efficiency benefits through the
reduction of search costs and other transaction costs, their mere formation is
almost always lawful. The antitrust exposure more typically arises from
operating rules or other collateral restraints governing the particulars of
[ 50 ]
MAY
2000
operation of the exchange — auction rules, exchange fees, access standards,
exclusivity requirements, and similar details.
To the extent that B2B exchanges present important new issues, those issues
derive mainly from the fact that technology offers the prospect of materially
increasing the transparency of competitive information. That transparency, in
the form of compilation and dissemination of information, is a principal source
of the exchanges’ efficiency benefits. In many circumstances, transparency is
procompetitive; in others, it facilitates tacit coordination and oligopolistic
interdependence. The challenge for public policy governing the exchanges is to
frame appropriate standards that balance the efficiency benefits of extensive, real
time, disaggregated information against the potential adverse competitive effects
that might arise from the same disclosures.
NOTES
1. 246 U.S. 231 (1918). See infra notes 65-66
and accompanying text.
15,225 (Mar. 31, 1994) (competitive impact
statement).
2. 373 U.S. 341 (1963).
7. See, e.g., United States v. Alex. Brown &
Sons, Inc., 1997-1 Trade Cas. (CCH)
¶¶ 71,788-89 (S.D.N.Y. 1997); see also In re
Nasdaq Market-Makers Antitrust Litig., 894 F.
Supp. 703 (S.D.N.Y. 1995).
3. 194 F.2d 484 (1st Cir. 1952). For other exchange cases involving restraints on membership, see American Federation of Tobacco
Growers v. Neal, 183 F.2d 869 (4th Cir. 1950);
United States v. New England Fish Exchange,
258 F. 732 (1st Cir. 1919).
4. See United States v. Rocky Mountain Automated Clearing House Ass’n, No. 77-391 (D.
Colo., dismissed Nov. 17, 1977); United States
v. California Automated Clearing House
Ass’n, No. 77-1643-LTZ (C.D. Cal., dismissed
Oct. 28, 1977). These were bottleneck monopoly cases seeking to compel regional automated clearing houses to admit thrift institutions to full membership. For a detailed
description of the cases and their underlying
theory, see Donald I. Baker & Roland E.
Brandel, The Law of Electronic Fund Transfer
Systems ¶ 22.01[1] (2d ed. 1988).
5. See United States v. Realty Multi-List, Inc.,
629 F.2d 1351 (5th Cir. 1980).
6. See United States v. Airline Tariff Publ’g
Co., 1994-2 Trade Cas. (CCH) ¶ 70,687
(D.D.C. 1994) (consent order); 59 Fed. Reg.
8. See Clare Ansberry, Let’s Build an Online
Supply Network!, Wall St. J., Apr. 17, 2000, at
B1.
9. For the distinction between participantcontrolled networks and proprietary networks, see text accompanying notes 15-18.
The participant-controlled networks in some
instances will face greater antitrust exposure.
See infra notes 38-40, 58-63, 70, 72, and accompanying text. For one list of illustrative “independent” sites, see Multiple Madness, Forbes,
May 1, 2000, at 124. The text of that article
indicates one of the sites serves “56 narrow
businesses, from meatandpoultryonline.com
to solidwaste.com.” Daniel Lyons,B2Bluster,
Forbes, May 1, 2000, at 122, 124.
10. The Wall Street Journal story, supra note 8,
carries the subhead “As the Trend Grips
Industries, Some Big Hurdles Loom: Logistics, Antitrust, Culture.”
[ 51 ]
ANTITRUST REPORT
11. Ansberry, supra note 8, at B10.
12. Don Tapscot,Virtual Webs Will Revolutionize Business, Wall St. J., Apr. 24, 2000, at A38.
13. Id. The same article reports that the announced site among aerospace manufacturers
will involve 37,000 suppliers to companies
with annual sales of more than $400 billion.
Id. Similarly, an announced plan among six
major airlines to “form an Internet marketplace for carriers and suppliers to buy and
sell airline-related goodsand services—from
paper cups to engine parts—at a discount”
will involve “about $32 billion of purchases
annually.” Melanie Trottman,Airline Alliance
Is Set to Form Online Market, Wall St. J., Apr.
28, 2000, at B2. An announced plan among six
tire and rubber companies will involve $50
billion each year of raw materials, equipment,
and services. Robert Guy Matthews, Six
Largest Tire and Rubber Companies Join Forces to
Create Online Marketplace, Wall St. J., Apr. 18,
2000, at A4.
14. See www.iso.ch (visited Apr. 29, 2000).
15. See Anatomy of a Fad, Forbes, May 1, 2000,
at 126.
16. See Lyons, supra note 9, at 122.
17. Addressing the proprietary networks, one
leading business publication has explained
that “[f]altering Web retailers are leaping into
B2B. Great—they’re just in time for the massacre.” See Lyons, supra note 9. A cover banner
referring to the story read “B2B: The Next
Web Massacre.” Id. at cover. For expression of
similar concern elsewhere, see Lee Gomes,
Once Hot Business-to-Business Dot-coms Are
Next Area of Web Worry, Wall St. J., Apr. 7,
2000, at B1; Bob Tedeschi, How Killer B-to-B’s
Slid to the Endangered List, N.Y. Times, May 7,
2000, § 3, at 1.
18. See supra notes 10-11 and accompanying
text.
19. The FTC has scheduled a public workshop
on B2B marketplaces for June 29, 2000, with
the goal “to enhance understanding of how
B2B electronic marketplaces function and the
means by which they may generate efficiencies, and to identify any antitrust issues that
they raise.” FTC, Press Release,FTC to Hold
Public Workshop to Examine Competition Issues
in Business-to-Business Electronic Marketplaces,
May 4, 2000.
20. FTC Enforcers Believe B2B Auctions Are
Similar to JVs, FTC:Watch, No. 542, Apr. 10,
2000, at 6 (reporting on comments of David
A. Balto, Assistant Director for Policy and
Evaluation, FTC Bureau of Competition).
21. Id. at 6-7.
22. Jonathan B. Baker, Director, FTC Bureau
of Economics, Horizontal Price-Fixing in
Cyberspace, Speech before the Conference
Board, 1996 Antitrust Conference: Antitrust
Issues in Today’s Economy (Mar. 7, 1996),
available at www.ftc.gov/speeches/other/
confbd4.htm; Jonathan B. Baker, Identifying
Horizontal Price Fixing in the Electronic Marketplace, 65 Antitrust L.J. 41 (1996). Also useful,
but even more distant from the specific issues
of Internet exchanges, is a thoughtful treatment of joint venture policy by an attorney
advisor to the FTC Chairman. See Michael S.
McFalls, The Role and Assessment of Classical
Market Power in Joint Venture Analysis, 66
Antitrust L.J. 651 (1998).
23. U.S. Dep’t of Justice & Federal Trade
Comm’n, Antitrust Guidelines for Collaborations Among Competitors (Apr. 7, 2000),
reprinted in Antitrust Rep., Apr. 2000, at 16-42.
24. See Paul A. Greenberg & Lori Enos,FTC
and DOJ Issue Joint Antitrust Guidelines, ECommerce Times, Apr. 10, 2000, available at
www.ecommercetimes.com/news/articles2
000/000410-2.shtml.
25. For a discussion of the problems of generality and ambiguity in the draft Competitor
Collaboration Guidelines, see ABA Section of
Antitrust Law, Comments on the “Antitrust
Guidelines for Collaborations Among Competitors” Issued in Draft on October 1, 1999 by the
Federal Trade Commission and U.S. Department
of Justice (Feb. 2000), available at www.aba
net.org/anti trust/collaborations.html. The
final Guidelines were substantially unchanged from the draft, and the concerns
expressed by the ABA Antitrust Section with
respect to the draft were not materially re-
[ 52 ]
MAY
2000
dressed.
lenge a joint venture if under the first
three steps, the Department concludes
that the joint venture would not likely
have any significant anticompetitive
effects. If, however, the Department’s
analysis under the first three steps reveals significant anticompetitive risks,
then …
the Department considers
whether any procompetitive efficiencies
that the parties claim would be achieved
by the joint venture would outweigh the
risk of anticompetitive harm.
26. U.S. Dep’t of Justice, Antitrust Guide for
International Operations (Mar. 1, 1977) (revising version of Jan. 26, 1977) [hereinafter
Guide for International Operations].
27. See supra note 4.
28. U.S. Dep’t of Justice, Policy Statement on
Sharing for the Nat’l Comm’n on Electronic
Fund Transfers (Jan. 13, 1977).
29. See Business Review Letter from Thomas
E. Kauper to Francis R. Kirkham concerning
National BankAmericard, Inc. (Oct. 7, 1975).
30. See Business Review Letter from Donald I.
Baker to William B. Brandt concerning Nebraska Electronic Terminal System (Mar. 7,
1977).
31. Guide for International Operations,supra
note 26, at 20 (emphasis in original). The
discussion is contained in a case (Case C) that
considers the legality of a venture to engage
in joint bidding in a Latin American country.
Id. at 15 (footnotes omitted).
34. U.S. Dep’t of Justice & Federal Trade
Comm’n, Antitrust Enforcement Guidelines
for International Operations (Apr. 1995),
reprinted in Antitrust Laws and Trade Regulation: Primary Source Pamphlet (1999 Matthew Bender). The Department states that the
1995 Guidelines
are intended to provide antitrust guidance to businesses engaged in international operations on questions that relate
specifically to the Agencies’ international
enforcement policy. They do not, therefore, provide a complete statement of the
Agencies’ general enforcement policies.
The topics covered include the Agencies’
subject matter jurisdiction . . . ; comity;
mutual assistance in international law
enforcement; and the effects of foreign
government involvement on the antitrust
liability of private entities. In addition,
the Guidelines discuss the relationship
between antitrust and international trade
initiatives.
32. Id. at 6-7 (note omitted; emphasis in original).
33. U.S. Dep’t of Justice, Antitrust Enforcement Guidelines for International Operations
(Nov. 10, 1988). The analytical framework as
expressed in the 1988 Guidelines is as follows:
First, the Department determines
whether the joint venture would likely
have any anticompetitive effect in the
market or markets in which the joint
venture proposes to operate or in which
the economic integration of the parties’
operations occurs (the “joint venture
markets”). Second, the Department determines whether the joint venture or any of
its restraints would likely have an
anticompetitive effect in any other market or markets (“spill-over markets”) in
which the joint venture members are
actual or potential competitors outside
the joint venture. Third, … the Department analyzes the likely competitive
effects of any nonprice vertical restraints
imposed in connection with the joint
venture. The Department will not chal-
Id. at 1 (footnote omitted).
35. U.S. Dep’t of Justice & Federal Trade
Comm’n, Statements of Antitrust Enforcement Policy in Health Care (Aug. 28, 1996)
[hereinafter Health Care Statements],reprinted
in Antitrust Laws and Trade Regulation:
Primary Source Pamphlet (1999 Matthew
Bender).
36. For particular provisions of the Statements
that relate to B2B sites, see infra notes 40, 4854, 76, and accompanying text.
[ 53 ]
ANTITRUST REPORT
37. See supra note 13 and accompanying text.
38. See supra note 21.
39. See supra note 20 (quoting agency staff as
stating, “The critical issue from an antitrust
perspective is why does the auction site have
to include buyers consisting of a large share
of the market? If the members consist of less
than 20% of the buyer-side market they may
be in a safe harbor.”). Whether the quotation
is accurate in capturing the use for which the
20% is invoked is unclear; in other industries
a 35% figure is used to measure buyer-side
power, and the 20% figure refers to the relationship of the jointly purchased product to
overall cost, see text infra at note 40.
40. Health Care Statements, supra note 35,
Statement 7.A.
41. See, e.g., In re Arbitration between First
Tex. Sav. Ass’n & Financial Interchange, Inc.,
55 Antitrust & Trade Reg. Rep. (BNA) No.
1380, at 340 (Aug. 25, 1988).
42. See Charles E. Rule et al., B2B or Collusion?, Legal Times, Apr. 3, 2000, at 36.
43. Supra note 6.
44. See Baker, Conference Board Speech,supra
note 22.
45. See, e.g., Leonard J. Mirman, Perfect Information, in The New Palgrave: A Dictionary of
Economics (John Eatwell et al. eds., 1987);
Steven S. Wildman, The Economics of IndustrySponsored Search Facilitation, in Electronic
Services Networks 56 (Margaret E. GuerinCalvert & Stephen S. Wildman eds., 1991).
46. ABA Section of Antitrust Law, Horizontal
Merger: Law and Policy 102 (Monograph No.
12, 1986) (collecting authority).
47. Alfred Marshall, Principles of Economics
325 (1920).
48. Health Care Statements, supra note 35,
Statement 5.A.
49. Id. Statement 5.B.
50. Id. Statement 9.C.
51. Id. (footnotes omitted). In a footnote the
Statements observe: “Use of an intermediary
or ‘independent’ third party to convey collectively determined price offers to purchasers
or to negotiate agreements with purchasers,
or giving to individual providers an opportunity to opt into, or out of, such agreements
does not negate the existence of an agreement.” Id. n.65.
52. Id. n.64.
53. Id. Statement 4.
54. See supra note 51 (discussion in Health
Care Statement 9 of limitationsof messenger
model); cf. United States v. Columbia Pictures
Indus., Inc., 507 F. Supp. 412 (S.D.N.Y. 1980).
55. For a particularly useful survey article
addressing the joint buying arrangements, see
Kathryn M. Fenton, Antitrust Counseling on
Group Buying Issues, Antitrust, Spring 1998, at
23.
56. E.g., White & White v. American Hosp.
Supply Corp., 723 F.2d 495 (6th Cir. 1983).
57. See supra note 40 and accompanying text.
58. See, e.g., William Blumenthal, Tensions in
the Law of Joint Ventures and Horizontal Conspiracies: Is Current Policy Sustainable?—Introductory Remarks, 57 Antitrust L.J.
835 (1989).
59. See, e.g., Broadcast Music, Inc. v. CBS, 441
U.S. 1 (1979).
60. See, e.g., Arizona v. Maricopa Cty. Med.
Soc’y, 457 U.S. 332 (1982); Health Care Statements, supra note 35, Statement 8.
61. Supra note 23.
62. See ABA Section of Antitrust Law,supra
note 25, § 3.2.
63. 446 U.S. 643 (1980) (per curiam).
64. Id. at 648. See also Detroit Auto Dealers
Ass’n, 111 F.T.C. 417 (1989) (striking down
agreement among car dealers to close showrooms at certain times), aff’d in part and rev’d
in part, 955 F.2d 457 (6th Cir. 1992) (finding
FTC improperly applied per se standard, but
affirming decision below based on rule of
reason analysis).
65. See supra note 1.
[ 54 ]
MAY
66. 246 U.S. at 238.
67. Under some auction structures, the identity of the winner is determined by highest
(lowest) bid, but the transaction is priced at
the next-best bid. For a useful discussion of
alternative auction structures, see Vernon L.
Smith, Auctions, in The New Palgrave, supra
note 45.
68. See United States v. Alex. Brown & Sons,
Inc., 1997-1 Trade Cas. (CCH) ¶¶71,788-89
(S.D.N.Y. 1997).
69. Competitive Impact Statement, United
States v. Alex. Brown & Sons, Inc., 61 Fed.
Reg. 40,433, 40,433-34 (Aug. 2, 1996).
70. See, e.g., National Bancard Corp. v. Visa
U.S.A., Inc., 779 F.2d 592 (11th Cir. 1986);
First Texas, supra note 41. For a useful discussion of pertinent economic theory, see Steven
C. Salop, Evaluating Network Pricing SelfRegulation, in Electronic Services Networks,
supra note 45.
71. Rule et al., supra note 42.
72. See Aspen Skiing Co. v. Aspen Highlands
Skiing Corp., 472 U.S. 585, 601 (1985) (“The
2000
high value that we have placed on the right to
refuse to deal with other firms does not mean
that the right is unqualified.”); United States
v. Colgate & Co., 250 U.S. 300, 307 (1919) (“In
the absence of any purpose to create or maintain a monopoly, the act does not restrict the
long recognized right of trader or manufacturer engaged in an entirely private business,
freely to exercise his own independent discretion as to the parties with whom he will
deal.”).
73. 472 U.S. 284 (1985).
74. Id. at 296.
75. Supra note 2.
76. See, e.g., Health Care Statements, supra
note 35, Statement 8.A.1 (safety zone for
exclusive physician network joint venture
where “physician participants share substantial financial risk and constitute 20 percent or
less of the physicians in each physician specialty with active hospital staff privileges who
practice in the relevant geographic area”).
77. Rule et al., supra note 42.
The FTC has scheduled a public workshop on
B2B marketplaces for June 29.
[ 55 ]