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The Internet trading exchanges being created by the largest companies in the automotive, aerospace, chemical, retail, paper, personal computer, steel and many other industrial sectors have suppliers running scared, federal regulators unsure of their antitrust implications and lawyers in a feeding frenzy.
The exchanges are intended to standardize procurement practices among the largest competitors in each vertical industrial segment and perhaps lead to joint purchasing arrangements intended to reduce the costs of common supplies.
Manufacturers that will sell their products to these buying collaborations of companies such as GM, Ford and DaimlerChrysler are not enamored by the possibility of their customers colluding to drive down costs. For the first time in U.S. history, monopsony -- the power of an oligopoly to drive down costs -- is becoming a real concern among antitrust lawyers and federal regulators. "The trading exchanges are coming, [and suppliers] had better prepare," says one Federal Trade Commission antitrust expert. "I wish you all the best of luck with your new life."
Another FTC official says that suppliers will soon start feeling like America’s cattlemen. Manufacturers "will be selling to a small group of buyers who will have near perfect information with which they can use to drive down prices as much as possible, and life will be hard," he says.
How hard will it be? The Federal Trade Commission and the Department of Justice want to find out. The FTC has scheduled a two-day conference in Washington, D.C., on June 29 and 30 to discuss the broad ramifications of the exchanges. The FTC expects a sell-out crowd to discuss the central questions being raised about the exchanges.
The Department of Justice and FTC are already taking a close look at the antitrust implications of the industry exchanges, "but it’s not clear at this point that we need to do anything unique" for these new institutions, says one FTC official who asked not to be named. Broad antitrust laws and more specific rules governing the behavior of trade associations and joint ventures should reduce the prospects for abuse, but rules tailored specifically to the behavior of the exchanges may be necessary. Such guidelines have not yet been drafted.
"We want to wait and see what comes out of the workshop and get a better understanding of the technical aspects of these exchanges," says one FTC official who is organizing the conference.
Government officials are extremely interested in receiving the perspective of suppliers, something that has not yet occurred.
"There may not be explicit collusion, but buyers might be tempted to work together to require a new level of warranty or better terms of payments before they allow suppliers to participate in their auctions," says one FTC official. The exchanges may not directly collude over prices, "but what if all the prices are transparent and everybody sees what everybody is bidding on?" he asks. "Maybe this enables them to collude tacitly better."
Regulators want to find out how the exchanges will generate cost savings and efficiencies among buyers and sellers. "We need to gain a perspective on how these marketplaces will effect the evolution of the markets in which they operate and then there will be a final opportunity to vet some of the antitrust issues that are being raised by some of these," says the FTC conference organizer.
Suppliers should be fearful of the potential ramifications of the exchanges, says another FTC antitrust expert. "If I was a manufacturer I’d be thinking of good stories to tell the antitrust agencies about why we need to look carefully at these."
Once operational, the big OEMs could have an opportunity to share information not only on their purchases but the purchases being made throughout their supply chains. "You will be able to go two or three steps down the line and see what your primary supplier is doing with his primary supplier," says David Evans, an attorney with Arent Fox in Washington, D.C. and chair of the American Bar Association’s Internet committee of the section of antitrust law. "By viewing into tier two and tier three, the companies will gain more transparency and the tier-one suppliers are going to be second guessed all along the road. It’s pretty nasty."
The free flow of information in markets has always been considered to be a good thing and the maxim has been that the more information that exists in a market, the better it operates. "But whether or not you have problems is another question when it approaches perfect information," says Evans. Adds one of the FTC officials: "If you have any trouble understanding the ramifications, [suppliers] should go look at farmers who have to deal with a small set of very powerful buyers with near perfect information."
Monopsony is suddenly a word that is on lawyers’ lips. "It’s a much bigger problem than monopoly because there are hardly any cases out there on monopsony and it rarely shows up," says Evans. "The exchanges provide a great opportunity to do that."
The companies creating the exchanges are fully aware of the antitrust implications and have lawyers on staff to make sure they are structured in such a way that regulators don’t disrupt their operation. But if suppliers are not comfortable with the exchanges, they need to let the government know about their concerns, because they will get a much better hearing from regulators than they will from the courts.
"The agencies are more sensitive toward microeconomic thought than the courts," says Evans. "The courts typically look at information exchanges as being innocuous, so it will be more of an uphill battle to fight it in the courts as opposed to going to the agencies and complaining."
The courts will be inclined to view legal action from suppliers as acts of desperation by companies incapable of modernizing their business and manufacturing processes and being able to compete in the new world order.
"Until it gets sorted out and we have some precedence in this specific area, I think there will be room for litigation if somebody feels particularly aggrieved," says Robert Heller, an antitrust lawyer with the New York firm of Kramer Levin.
The regulators are not starting from the position that the industry vertical trade exchanges are illegal or nefarious, says one Justice Department official. The Justice Department is reviewing one exchange created in the farm equipment sector, and there are reportedly other investigations into the automotive and aerospace exchanges, although the government is not allowed to talk about these.
"They are starting with a bias and that bias is that competitive collaborations can frequently be benign and pro-competitive and efficiency enhancing, which is the jargon of antitrust lawyers," says Heller. "They are looking at these arrangements as having legitimate pro-competitive effects."
One of the FTC officials says the exchanges are an "important business phenomenon that has the potential to generate real efficiencies that could well result in lower prices to consumers. That is very exciting."
The exchanges "will be prepared to work with the government to try to clean up any ambiguities so they are not viewed as vehicles for collusion and coordination, says Heller. "Designing them in a way that will pass muster is part of the art here."
Evans can be reached at 202-775-5729. Heller’s number is 212-715-7500.