UK: B2B Marketplaces And EU Competition Rules

Last Updated: 17 January 2001

Over the past two years, e-commerce has evolved rapidly in the area of business to business electronic trading platforms (so-called "B2B marketplaces"). B2B e-commerce now comprises more than 80% of total e-commerce. In many significant industry sectors (e.g. car manufacturing, aerospace, insurance, and banking) companies are restructuring their operations, heralding a deep-rooted change in the way they do business.

The aim of B2B marketplaces is to create an open trading platform to which all buyers and sellers can gain access. These marketplaces allow companies to reduce their purchasing and procurement costs, reduce time-to-market, and improve product and service quality. Overall, they produce significant efficiencies in terms of reduced transaction costs and more efficient management of inventory and production. As a result, B2B e-commerce has the potential to promote competition, lower entry barriers and decrease market consideration.

The establishment of these kinds of B2B marketplaces, however, often involves co-ordination between competitors in a particular industry (especially where there is joint buying), which raises competition concerns. Competition authorities on both sides of the Atlantic have yet to take a stance on exactly how competition rules should be applied to such B2B marketplaces. Fortunately, the consensus appears to be to not stifle innovation nor to obstruct genuine efficiencies through the imposition of too many rules and regulations, and to intervene only when there is a genuine threat to competition. For example, the European Commission ("Commission") has recently approved, a B2B company in the aerospace sector set up by UTC and Honeywell Int. Inc., both of whom are active in the manufacture and sales of aerospace products and services.

Essentially, competition authorities will examine B2B marketplaces carefully to determine whether they are a legitimate joint venture or a disguised cartel created to raise prices and/or engage in anti-competitive behaviour. The Commission’s concerns are likely to centre on situations in which the marketplace leads to co-ordination between competitors, for example, through the exchange of sensitive price information or the creation of market power on either the relevant buying or selling markets.

Many B2B marketplaces provide for joint purchasing by members. By combining their buying power, purchasers may achieve better terms and conditions from suppliers. Under draft Commission guidelines an analysis of any such joint purchasing arrangements will focus on two separate markets: the purchasing market ("upstream") and the selling market ("downstream"). The marketplace will not be considered as anti-competitive if the parties to an agreement have a combined market share below 15% in both markets. Above this threshold, the Commission will carry out a detailed assessment of the impact of the joint purchasing arrangement on the market, in particular to deter-mine whether "buyer power" in the purchasing market will have anti-competitive effects in the selling market, such as the co-ordination of competitive behaviour, or the foreclosure of other suppliers. The Commission takes the view, in particular that the higher the participant’s market share, the less likely the cost savings are to be passed on to the consumer.

In the event that the establishment of a B2B marketplace does infringe Article 81(1) of the EC Treaty, then an analysis is required under Article 81(3) to determine whether it qualifies for exemption. The Commission will ask the following questions:

*will the marketplace result in genuine cost efficiencies for the parties?

*will the parties purchase a significant proportion of their total supplies jointly through the marketplace?

*are restrictions on competition on either market (i.e. "upstream" and "downstream") necessary to achieving the efficiencies?

*will the parties’ combined market power enable them to eliminate competition in either the upstream or downstream market for the relevant product or service?

The Commission will also take into account the current developments in the particular sector (i.e. how many other marketplaces exist), the possibility that any of these marketplaces may merge to form one dominant marketplace, and any restrictions placed upon the parties’ control or use of the transactions or players in that marketplace.

To sum up, if you are considering membership of a B2B marketplace, bear in mind that a legitimate marketplace is one in which there are real marketplace efficiencies, and where the actual or potential pro-competitive benefits out-weigh the actual or potential anti-competitive effects. An illegal marketplace is one that constitutes a "disguised cartel" between competitors to fix prices, or to allocate markets, customers or suppliers. Although the general approach of the Commission to B2B marketplaces is positive, you can expect it to trawl through the finer details of your agreement for evidence of any cartel-type behaviour. Have no doubt that the Commission will clamp down on B2B marketplaces that in any way threaten competition and disadvantage the consumer.

The information and opinions contained in this publication are provided by national law firm Hammond Suddards Edge. They should not be applied to any particular set of facts without seeking appropriate legal or other professional advice.

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