'Neutramediaries' is the latest buzz word of the 'new economy'. 'Nuetramediaries' are independent third parties who provide 'arms length' infrastructure services to B2B electronic marketplaces. These neutramediaries can help safeguard the owners and operators of B2B electronic marketplaces against accusations of anti-competitive practises. Antitrust challenges to B2B electronic marketplaces are not theoretical. Arbitrary entry barriers, unlawful information sharing and potential collusion by B2B owners and operators are issues that do need to be considered very carefully by busy B2B exchange entrepreneurs.

In the race to maximise on market segment, and on profitability, B2B Internet exchanges may be reluctant to outsource any potentially lucrative business functionality to neutral third parties. But, the reality is that private sector initiatives, by independent neutramediaries, offer B2B Exchanges an infrastructure that will give their commercial venture competitive credibility with antitrust regulators.

The ownership structure of a B2B Internet Exchange, its criteria for membership, the governance structure, its pricing mechanisms, the transparency of its products, the independence of its grievance procedures etc. Each of these are factors that will be considered by the regulators if suggestions or allegations of anti-competitive behaviour arise.

The stunning growth projections for B2B electronic trading platforms are of natural interest to antitrust regulators in the US, and to their counterparts in the EU, simply because e-commerce has the potential to truly liberalise the markets, offering participants greater choice and transparency than has ever before been thought possible. But, the power of the new technology underlying B2B electronic marketplaces also has the potential to raise traditional antitrust questions about information sharing and collaboration amongst competitors.

The movers and shakers of the 'New Economy' convened in Washington D.C. at the end of June 2000 to discuss the antitrust issues that may arise in B2B electronic marketplaces. 'High Tech' B2B trading platform owners, operators, suppliers, buyers, their lawyers and lobbyists gathered in the Jefferson Auditorium at the Department for the Agriculture for a 2 Day Workshop, hosted by the Federal Trade Commission, on B2B Electronic Marketplaces.

The goal of the FTC Workshop was to lay the foundation for understanding how best to answer antitrust questions in the context of the new B2B technology that is driving the reinvention of business on a global basis. The three fundamental categories of B2B electronic marketplaces were discussed; Catalogs, Auctions and Exchanges. Catalogs collate product data from multiple vendors so that buyers can easily compare it. Auctions enable buyers to bid competitively for products from individual suppliers. In forward auctions prices move up with the bidding. In reverse auctions prices move down. Lastly, B2B Internet exchanges are two-way marketplaces where buyers and sellers negotiate prices, usually through a bid/offer system, and where prices move up and down. These three types of electronic marketplace can, however, assume as many forms in the 'new economy' world as they do in the offline B2B world.

The FTC was very definite in its espousal of the fantastic pro-competitive opportunities that the B2B marketplaces are now creating. Workshop panellists acknowledged that most B2B Exchanges currently plan to create an 'open platform' to which all buyers and sellers within their industry can gain access. The FTC warmly welcomed and encouraged this approach. Open access policies have the potential to make smaller buyers and sellers more competitive by putting them on the same platform, and making their products as easy to locate and evaluate, as those of better known rivals. The FTC cautioned strongly against the use of arbitrary eligibility criteria to prevent smaller players - manufacturers, wholesalers or retailers - obtaining access to the Exchange. Neutramediaries can assist B2B Exchanges in this vulnerable antitrust area of 'open access' by providing independent Membership, Compliance and Enforcement Services for them. The FTC was also very definite in its position on the issue of the management of information sharing. Information sharing through a B2B Exchange has the potential to significantly increase the cost efficiency of the supply chain in the underlying industry. However, these information sharing activities also create a risk that competitors participating in a B2B Exchange will be able to use that participation to obtain access to proprietary information regarding prices, costs and output of other competitors that can be used to facilitate collusion.

The way around this potential antitrust problem of improper information sharing is to establish strict competition and confidentiality guidelines that provide, among other things, that improper sharing of competitive information will result in severe penalties. Third party 'neutramediaries' who provide independent monitoring, compliance and enforcement services to an Exchange will alleviate many of the information sharing concerns of antitrust regulators. The retention of an independent neurtamediary can effectively demonstrate to a regulator that the parties forming a B2B Internet exchange are not using the information gathered by the exchange to facilitate collusion.

It was clear from the FTC Workshop that B2B Internet exchanges, in particular, are still at a very early stage in their development and that, in the race to establish trading platforms, the legal framework for operating these exchanges has not yet been comprehensively addressed by the exchange owners/operators. In order to be termed 'perfectly competitive' the market created by an old, or new, economy exchange has to have a number of characteristics, the main ones being: (1) many suppliers and buyers; (2) no entry barriers; (3) a homogeneous product; and (4) full transparency. It is true too, however, that few marketplaces ever attain this Nirvana.

Electronic Internet exchanges will usher in a truly global marketplace. The national regulators of these marketplaces, particularly the competition authorities, have very valid concerns about potential abuses of market power, clearing and settlement reliability, and a dependable scheme of remedies to address grievances and defaults.

The potential for anti-competitive effects is always prevalent within a marketplace. The spill over effects of information sharing between competitors who jointly operate a B2B Exchange must necessarily be of concern to regulators. One prominent recent example eloquently illustrates why. Ford, General Motors and DaimlerCrysler recently agreed to abandon their own proprietary Internet purchasing operations and to create an independent automotive parts Exchange. This B2B Exchange represents more than US$240m.

Private sector initiatives, by independent neutramediaries, offer B2B Exchanges an infrastructure that gives their commercial venture competitive credibility with antitrust regulators. Burdensome regulation stifles innovation. Throughout the 2 day Workshop the FTC openly acknowledged and accepted this fact. The ultimate message was clear. The retention by B2B electronic Exchanges of the independent functionality of Neutramediaries will send a very strong signal to antitrust regulators that the B2B Exchanges take their competitive responsibilities seriously. Good B2B exchange practises and the adoption of a solid, independent compliance and enforcement framework is likely to solve most regulatory anticompetitive worries.

Very importantly too, the liquidity of B2B Internet exchanges will be enhanced by the presence of a common touchstone that can assure the global business community of the bona fides of the exchange. In order to establish the requisite market liquidity than an exchange needs to survive, the exchange needs to generate a high volume trade turnover. An exchange will only achieve this if the transactions that are traded through the exchange clear and settle effectively. This crucial commercial process can be quickly ensured through links with a neutramediary that can provide sophisticated clearing and settlement services to an exchange and its customers. CapCLEAR is the world's first global Internet Clearinghouse. We provide clearing, settlement, compliance, dispute resolution and enforcement services for B2B electronic exchanges. We aim to catalyse B2B Internet trade.

 

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