Toward Optimal Auction Rules for eB2B eXchanges

John W. BagbyCenter for Supply Chain ManagementThe Pennsylvania State University

Models of eCommerce Based on Traditional Contract Principles

1. Informational Model

2. Mutual Assent Model

3. Consideration Model

4. Performance Model

Informational Model

Identifying Buyers & Sellers Connecting Buyers w/ Sellers Identifying & Soliciting 3d Parties Communicating/Revising Specifications Communicating/Revising (K) Terms Collect/Distribute Counter-Party Data – Customer dossiers: for sale or barter– Eyeballs, banner ads, referrals, branding

Mutual Assent Model

Agents’ authority to bargain or obligate Negotiations, inquiries regarding terms Offers, acceptances, counter-offers, rejections, modifications, repudiation POs, confirmations, invoices, battle of the forms, std./collateral terms Trading partner agreements S/F - memo, P/E - integration, notices, traditional signatures/initials, clickwraps UETA, e-Recs, DigSig, e-Sigs, authentication

Consideration Model

Traditionally blocked enforcement unless all parties bound to new obligations – Peppercorn theory– New legally enforceable duty to do or refrain from doing

something not previously obligated – Duty NOT contingent on wish will or desire

B2B: scriveners careful, UCC exceptions B2C: site access contingent revealing data B2G: Govt could repudiate (e.g., TX, GA)

Performance Model

Currently Intangibles only: – Data, artistic expression, advice, reports, software,

images, audio, video, notices Maybe someday Smell-O-Vision or Trekies’ Transporter Room e-Doc custody, transmit, present, endorse Book entry of e-records e-Pmts UCITA: software, data

e-B2B Evolution

1st Phase: Traditional EDI– Dedicated secure communications– Trading partner agreements

2d Phase: 3d Party eXchanges – Multiple buyers/sellers – Vendor resistance to price competition

3d Phase: Industry Procure Consortia – Oligopsonists force vendor participation

Impetus-Centric Model: a Refinement

Seller-Centric

Buyer-Centric

e-Market-Centric

Buyer-Centric eXchange

Single Buyer

Multiple Vendors

Buyer-Centric eXchange Characteristics

Monopsony: buyer’s market powerCaptive suppliers reluctance Buyer likely owns &/or controls eXchangeQualification of sellers to maintain quality, confidentiality & security Buyer imposes uniformity in specifications & sale terms

Seller-Centric eXchange

Single Vendor

Multiple Buyers

Seller-Centric eXchange Characteristics

Monopoly Power Captive Buyers Seller likely owns &/or controls eXchange Qualification of buyers to maintain creditworthiness, confidentiality & security Seller imposes uniformity in specifications & sale terms

e-Market-Centric eXchange

Multiple Vendors

Multiple Buyers

Independent eXchange Market

e-Market-Centric eXchange Characteristics

Opportunity for Mkt’s Independence e-Trade show Considerable visibility possible: – Parties identity & capabilities – Price, specifications, sale terms

Appears closest to perfect competition – Infinite buyers & sellers, perfect information,

standardized products Terms visibility encourages signaling

Spawning Independent eB2B eXchanges

Barriers to Entry: Participation, recruitment, membership Replicable infrastructure – Software, hardware, connectivity – IProtectable market mechanisms

Independent if high transactions fees, unique/complex MoDB Dependant if no/low transactions fees, generic/simple MoDB

Counter-Party Reliability

B2C e-Auctions – 1999 over 10,000 complaints to FTC – Misrepresentation of goods – eBay uses reputation bulletin boards for parties – Whats next? on-line credit bureau, background

checkB2B eXchange – Risks when buyers unknown to vendors – How about a Dunn & Bradstreet plug-in?

Channel Squeal

Resellers will defend turf & margins Resort to Political & Legal Means – Franchisee protection laws– Preempts vendor B2C skirting intermediaries

Reluctance to participate in eB2B eXchanges Potential for resentment & retribution Evaluate reseller value added & powers

Precedents from Existing eXchange Experiences

NASDAQ is THE Preeminent Model Unequaled transaction volume Instant visibility of price, Q, timing Liquidity, standardization, mkt. making Clearance, delivery, pmt mechanisms Distinguish IPO from secondary mkt.– Dealers vs. brokers, underwriting risk, fungible

standard “goods,” SRO

eB2B eXchange: an Auction?!?

Implications of true Auction – Standardized or identified goods– Standard terms of trade, only price varies – Never’ll be more than a spot market

eB2B eXchanges envision: – Customized goods & quantities– Joint design of product specifications – Iterative, confidential communications – RFP’s, RFQ’s, expressions of interest

Distinctions limit existing model’s utility

eB2B eXchanges Antitrust Aspects

Adam Smith’s Famous Quote: Seldom do competitors meet for merriment or otherwise than

their conversation will turn to a contrivance against the public

Close scrutiny given horizontal joint ventures & trade association activities – Convenient collusion/price fixing conduit

Exclusionary: essential facility – Division of markets, group boycotts, standards setting all

suspect

Price Signaling & Coordination

Typified by allegations in SABRE case eXchange communicates price tests Conscious parallelism price fixing method – Tacit price fixing agreement, mimic price leader

Famous hardwood industry pricing policing – Paper publication of all transactions identifying buyer,

seller, grade, quantity, date & price – Jawboning against discounts @ trade assn. mtg

OPEC’s formal policing & data reliability

Business Model & Method Patents

Business Methods ARE Patentable since State St. Bank hub & spoke mutual fund Anything [Human-made] Under the Sun is Patentable if it Produces a . . .– Useful, Concrete, Tangible Result (UCTR)

Business Method Exception was Illusory MoDB Patents: 21st Century Gold Rush Consider Impact of Priceline’s famous Reverse Auction on eB2B eXchanges

Defining Business Methods

Financial, accounting, manufacturing, logistics, etc.Need Business Modeling Conventions– What components & orchestration to UCTR

“Methods” Are Business Methods (‘99 Act) – Business Plans for VC Review– Trade Secrets – Business Models

eB2B eXchanges may Involve Innovative Business Models & MAY be Patentable – Potential fee source for eXchange

Eiplogue

eB2B eXchange Architecture is THE Fundamental Difficulty at the OutsetTwo Major Concerns Balanced:– Capture of benefits by initial participants – Avoidance of repercussions from design flaws

• Failure of Market Acceptance from operational difficulties or perceived unfairness

• Legal risks: contracting, IP, antitrust