SUMARY.- I. Introduction.-II. Getting down to e-business.-2.1. Lures of e-commerce.-2.2. An e-commerce sales channel.-2.3. Models of B2B.-2.4. B2B Electronic marketplaces: Definition, origins and classifications.-2.5. Who operate on and do e-marketplaces possible?.-III. Competition issues in the e-distribution channel.-3.1. Delimitation of our subject.-3.2. Vertical restraints: European legal framework.-3.3. Relevant market.-3.4. Market power and concentration.-3.5. Article 4 of the Regulation (EC) 2790/1999: the hard-core restrictions.-3.6. Article 5: Non-competition agreements.-3.7. Other vertical restraints aspects to comment.-IV. Conclusion.

I. INTRODUCTION

B2B has been characterised as the new business development most likely to transform how business is conducted in the twenty-first century.

Large companies, technology providers, start-ups, cash investments and other corporations see e-markets as the future way of doing business and are investing in their creation. E-markets are also expected to be the best way for SMEs to go into e-business.

Authorities of competition are starting to clear mergers and joint ventures of companies which want to or have already built an e-marketplace. The first issues that authorities of competition have had to take in account are related to horizontal agreements between competitors, but competition issues from vertical agreements in the supply chain can also arise in the field of e-markets. Authorities know that and have started to study by means of workshops possible effects of e-commerce in the distribution channel.

It is not our intention to try to give the necessary answers to resolve all the problems which can arise in the distribution channel because of e-commerce, but clarify some concepts around e-marketplaces and the structure where they run, and explain the most important vertical competition issues of e-commerce, specially e-marketplaces.

We will thus divide this speech in two main parts: a first one, where we talk about concepts and structures of e-commerce to situate e-marketplaces in the e-world; and a second part, focused on the study of current vertical restraints in the European legal framework, their viability in e-business and new foreseeable issues to come.

II. GETTING DOWN TO E-BUSINNES

Electronic commerce is the exchange of goods and services, usually for money, through the World Wide Web.

Depending on who are the parts of the exchange, there are five different types of e-commerce: business-to-consumer (B2C) , consumer-to-consumer (C2C) , business-to-business (B2B), business-to-government (B2G), and government-to-consumer (G2C).

2.1. Lures of e-commerce.

The general lures of e-commerce for business are widely recognize and may be summarized in the following:

a) e-commerce means for business lower transaction costs, possibility of larger purchases per transaction , integration into the business cycle and possibility of creating larger catalogues .

b) E-commerce also means for business a better service for their customers. New features that web sites offer include the ability to build an order over several days, to configure products and see actual prices, to easily build complicated custom orders, to compare prices between multiple vendors easily, and to search large catalogues easily. Moreover, with automated tools it is possible to interact with a customer in richer ways at virtually no cost. For example, the customer might get an email when the order is confirmed, when the order is shipped and after the order arrives. A happy customer is more likely to purchase something else from the company.

However, there are still some current barriers for the expected explosion of B2B:

a) There are so many web sites and it is so easy to create a new e-commerce web site, that getting people to look at yours is the biggest problem. It will be also difficult that people return to your web site a second time as well as differentiating yourself from the competition.

b) It is still difficult to get people to buy something from your web site. Having people look at your site is one thing, and getting them to actually type in their credit card numbers is another.

c) Integrating an e-commerce web site with existing business data usually involves office automation and networks. There are related concerns about SMEs ability to fund the investment required, for the necessary advertising and the incorporation to the latest technology trends to be able to compete with the big companies’ web service, can be too high costs for SMEs. Thus, as we will explain below, the entrance to an e-marketplace can be the solution for many SMEs.

2.2 An e-commerce sales channel.

There is some belief that the greatest benefits from transaction e-commerce are to be found on the supply side, rather than on the demand side. In an e-commerce sales channel you find all the traditional sales channel elements, but they change slightly :

1. There is a product: good or service, tangible or intangible.

2. There is a place to sell the product: in the e-commerce case a web site displays the products in some way and acts as the place.

3. There is a way to get people to come to your web site: normally advertising on and off the web.

4. There is a way to accept orders: normally an on-line form of some sort. Extendible Mark-up Language (XML) is the B2B “alphabet” that allows efficient Internet communication by providing a uniform way to describe all the required fields in a purchase order and thereby creating an open environment for B2B communication.

5. There is a way to accept money: normally a merchant account handling credit card payments. This piece requires a secure ordering page and a connection to a bank. Or you may use more traditional billing techniques either on-line or through the mail. Making e-payments has been well established for several years, particularly using Electronic Data Interchange (EDI) over private or value-added networks.

6. A fulfillment facility to ship products to customers: often outsource-able. In the case of software and information, however, fulfillment can occur over the Web through a file download mechanism.

7. A way to accept returns.

8. A way to handle warrantee claims if necessary.

9. A way to provide customer service: often through email, on-line forms, on-line knowledge bases and FAQs. There is also often a strong desire to integrate other business functions or practices into the e-commerce offering. For instance, you might want to be able to show the customer the exact status of an order, as FedEx did when they introduced on-line package tracking, making far more information available to the customer.

2.3. Models of B2B.

Depending on the relative number of sellers and buyers interacting in each commercial transaction, we can differentiate three models of B2B:

1) one-to-many model: where one seller interact with many buyers. Auctions and selling from the seller’s web site are one-to-many systems for doing B2B.

2) many-to-one model: where many sellers interact with a single buyer. This is the model of reverse auctions and vendors catalogues.

3) many-to-many model: where many sellers and buyers interact each others. E-marketplaces work on a many-to-many basis. A company that conducts transactional e-commerce via an e-marketplace is one of a community of companies that uses the e-marketplace to sell and/or procure its products.

It is thus important to clarify that e-marketplaces are based just on a way to do business-to-business but not the only one as we have just seen. However, a lot of times we can read the concept “B2Bs” being used to mean “B2B electronic marketplaces”, creating more confusion to readers trying to understand and enlighten concepts and structures around the complicated by itself virtual world and the new forms of doing business. The distinction above can be very helpful and might always be kept in mind.

2.4. B2B Electronic marketplaces: Definition, origins and classifications.

E-marketplaces are Internet-based electronic markets designed to allow online business-to-business communications and transactions.

The origins B2B electronic marketplaces (e-marketplaces) in Europe date back to 1996, when British Telecom became one of the first organisations to establish a Private Digital Exchange (PDE) known as BT Trading Places. However, it was soon recognised to be too early on in the evolution of e-business for the e-marketplace concept to work successfully and BT’s PDE was withdrawn.

By 1998, the concept of e-marketplaces was becoming more widely accepted and, indeed, in this year BT decided to re-launch BT Trading Places as a fully fledged, true e-marketplace. However, it was not until the latter half of 1999 that there was a world-wide explosion in the number of e-marketplaces being developed, and hence the associated demand for e-marketplace ICT solutions and services really began .

There are several ways to classify current e-marketplaces. We will refer to the two main ones which are based on the nature of the participants and the ownership structure of the B2B.

Considering the nature of the participants, we can distinguish between horizontal, vertical and diagonal e-markets:

1. Horizontal e-markets.

Horizontal e-markets help link commerce between multiple industries, helping buyers to purchase a wide variety of operating inputs, also known as indirect materials, which are referred to by the acronym MRO (maintenance, repair and operating equipment). The e-marketplace Liquidation.com is an example of horizontal e-market where users can buy or sell excess inventory and surplus assets.

2. Vertical e-markets.

Vertical e-markets help link commerce within a single industry, providing direct inputs -such as the raw materials or components used directly in the manufacturing process-, product expertise and in-depth industry knowledge. One example of vertical e-market is Myaircraft.com which objective is to make operations within the aerospace sector quicker, more efficient and less costly.

3. Diagonal e-markets.

Because there are not hard-and-fast rules, we can see also horizontal B2B marketplaces which supply direct inputs, as well as vertical markets offering MRO products along with the direct inputs required by their particular industry. Some people refers to this cases as diagonal e-markets.

Considering the ownership structure of the B2B, we can distinguish between participant-owned e-markets and independent e-markets:

1. Participant-owned e-markets.

Within this type of e-markets are included:

a) the so-called buyer-driven electronic markets, which are established by a consortium of buyers in order to procure products from their suppliers via the Internet.

b) the so-called sell-driven electronic markets, which are established by a consortium of suppliers/sellers that are looking to sell their products on-line via the e-marketplace

2. Independent e-markets.

Independent e-markets are those established by independent organisations. This independent organisation’s main motivation can be simply to obtain revenues through operating the marketplace on behalf of buyers/sellers. However, if the organisation is a technology provider, the motivation to set up the e-marketplace can be quite different. It is thus convenient to differentiate between real “independent e-markets” and the so-called technology provider e-markets.

The independent organisations which create independent e-markets usually have cash investors behind them and frequently are within the most innovators. Of the 650 e-marketplaces currently in existence in Europe, independent e-marketplaces account for the vast majority (64%).

Anyway, what we are seeing in many cases are “hybrids e-markets”. For example, buyer and seller-driven electronic markets are created usually by large buyers or sellers respectively joined with technology partners. For example, this is the Covisint case, a seller-driven electronic market where Oracle and Commerce One are the technology partners.

Of all these types of e-market, buyer-driven e-marketplace model is the only one purely B2B. The others are currently primarily B2B, but have also the potential to be business-to-consumer.

2.5. Who operate on and do e-marketplaces possible?

It is important for our study and the delimitation of its object to explain firstly and briefly who and how are operating on e-marketplaces structure to become possible as a real way of doing business.

1. Telecom operator.

Telecom operator is who offers transmission capacity such as switched telephony networks, mobile networks, satellite and cable-TV networks.

2. Hardware sector.

Hardware companies offers PCs and other terminals, process equipment, chips and semiconductors devices, local storage capacity and modems, servers, mobile handsets and peripherals. They will also provide new products which are to come such as hybrid products between TV-sets, PCs and wireless devices.

3. Software sector

Software companies offers the operating systems -such as Windows or Linux-, browsers -Netscape or Internet explorer-, search engines, security tools, authentication and encryption services, protocols and standards such as WAP, and so on. They also provide specific enterprise applications such as electronic platforms for conducting transactions in a specific economic sector or supply chains or customer care applications. This electronic platforms are the so-called “exchange engine” of the e-marketplaces, what means the software solution that runs the e-marketplace.

A particularly interesting new product in this sector are the so-called “middleware” applications, that enable integration of applications and equipment working under different operating systems and/or standards.

4. E-minded entrepreneurs.

E-commerce needs to run a combination of resources from telecom, hardware and software sectors. That is why a new type of market agents –which we can call “e-minded entrepreneurs”- have come to rise. E-minded entrepreneurs are, for example, the Internet Service Providers (ISP’s) –such as Terra, Wanadoo or T-On Line -, and the Portals –such as AOL, Yahoo or Lycos- .

In this sense, and now talking about the B2B transactions, there is a new generation of companies developing electronic marketplaces applications for different industries. This companies that create and manage the technical solutions for each B2B are called B2B infrastructure companies . They provide the technical platform that defines the functioning parameters of the B2B, and after helping establish an online B2B, the infrastructure companies often take an equity stake in the B2B. Some well-known B2B infrastructure companies are Commerce One –a procurement software specialist-, FreeMarket –focused on auction software-, i2 –aimed to streamline “back end integration”- and VerticalNet, which emphasises site content.

5. The users of e-marketplaces: buyers and sellers

The users of e-marketplaces may be large corporations, SMEs, micro businesses, consumers or government departments. We will focus on companies as users -large, medium, small and micro businesses-.

Whereas large corporations are also likely to take part on the establishment of e-marketplaces, SMEs -except a few of them and specialist start-ups- are not generally the type of company who become e-marketplaces owners. They usually are users of e-marketplaces.

As customers of e-marketplaces, large corporations are more likely to be larger buyers in volumes and values than SMEs.

As suppliers to e-marketplaces, large corporations are more likely to be bigger sellers by absolute volume and value, but SMEs can be biggest sellers by percentage of their total output, and the benefits which flow from being a seller to e-marketplaces are proportionately more significant for SMEs.

III. COMPETITION ISSUES IN THE E-DISTRIBUTION CHANNEL

3.1. Delimitation of our subject.

Competition is everywhere on the Internet and affects to all the participants named in the epigraph 5 and their relationships. Most of the already treated competition issues around the Internet refer to Telecom infrastructures (e.g. MCI Worldcom/Spring case). Regarding software companies field, everybody knows Microsoft cases. On the other hand, TV-digital is raising concerns about the possible competition issues around its needed sep-top boxes (e.g. Vodafone/Vivendi/Canal+ case). There is also concern about the new vertical concentrations which are taken place between Telecommunications, Information Technology and Media sectors to offer different types of services (e.g. Online Inc. (AOL)/Time Warner case).

In the B2B electronic marketplaces world, joint ventures and mergers created to develop e-marketplaces can raise horizontal competition issues (e.g. Covisint case). As for the users of e-marketplaces (buyers and sellers) competition issues can raise in two ways: from horizontal agreements between competitors and -the most important for us for being our objet of study- from vertical agreements between participants in different levels of the supply chain.

We will start explaining briefly the current vertical restraints policies in the European regulation of competition.

3.2. Vertical restraints: European legal framework.

Vertical restraints are provisions made between undertaking operating at a different level of the production or distribution chain.

Vertical restraints are considered less harmful than horizontal restraints. Vertical restraints can have substantial efficiency benefits, by aligning interests between retailers, between producers, or both, on issues such as marketing of brand or provision of high quality service and product range. They can also play a vital role in limiting risk where either party makes sunk investments in the supply relationship. They are also far more likely to be embodied in specific contracts, rather than inferred from discussions, so there is less risk that ambiguous conduct will be misunderstood.

In general, “vertical agreements” with suppliers and buyers are not prohibited and do not have to be notified to the European Commission . However, there is some vertical restraints which can potentially mean anti-competitive effects.

European regulation uses two parameters to analyse the possible anti-competitive effect of vertical restraints: the existing market power and the nature of the vertical restraint. If there is not a market power situation, a presumption of compatibility of vertical restraints is admitted, except in specially serious vertical restraints cases . The new Block Exemption Regulation allows companies whose market share is below 30% to benefit from a so-called safe harbour under the Community competition rules.

3.3. Relevant market.

Competition authorities have two main issues to resolve concerning to the concept and delimitation of relevant market in the case of e-companies: determining the relevant geographical market, and deciding to what extent an Internet market can be considered as a relevant market in itself or as a particular market segment of the traditional one.

3.3.1. Relevant geographical market.

When determining the definition of the relevant geographic market in an e-commerce case, the relevant question will be whether the geographic market will be widened as location becomes less of an obstacle to trade between parties.

Because the Internet enables buyers and seller to find each other more easily, wherever they are located, e-commerce markets will tend to be wider than traditional geographic markets. Credit card payment and easy-to-use ready reckoners (to calculate prices in local currencies) may further facilitate cross-border trade, as will growth in internationally recognised brands. This may raise important jurisdictional issues, and increase the need for cooperation between competition authorities in different countries .

This market-widening will be especially important for b2c transactions, where buyers are relatively small and unsophisticated and might previously have bought from their local provider. Many B2B markets, by contrast, will already have being better informed about the available suppliers. In this sense, in the Myaircraft.com case, the Commission considered this question largely irrelevant, as even the traditional market for aerospace products and services is likely to be world-wide. However, the question is still up in the air for next coming cases no so clear.

3.3.2. Parallel markets (Bricks and mortars/Online)

An interesting question to define relevant markets is to what extent an Internet market can be considered as a relevant market in itself or as a particular market segment of the traditional one. For the present, the position of the European Commission have been considering b2b electronic marketplaces as part of a wider market, as one segment among the many modalities by which companies transact. In other words, Internet would lead to the creation of two segments –physical and online- that belong to the same market.

In accordance with the European Commission workshop , the pertinent question for the definition of the product market will often be whether an electronic marketplace competes with conventional bilateral sales or whether it constitutes a separate product market. The former would be likely if participants used electronic marketplaces only as an additional sales channel; the latter if the exchange offered additional services which clearly differentiate it from other sales forms. Let us think about it for a while:

Dealers and distributors, after all, do not make the products they sell. So, they cannot really compete based on features and functions. Their competitive advantage is based on price, availability, and service. Competing only on price kills, profitability, and availability is often outside their control. Service is thus a key success factor for dealers and distributors. Indeed, one of the major allures of e-commerce is the remarkable improvement of the service we can offer to our customers. Now we are in the third generation of online service solutions and it takes full advantage of the Internet, solving cost and delay problems of earlier generations while providing customers with immediate answer, accurate and relevant information, and content created by means of a customer-driven, self-learning knowledge base. Moreover, the web service of tomorrow will be truly personalized, providing information, content, and updates targeted to specific customers. Customer needs will be anticipated, responses will be proactive and personal. Anytime, anywhere service will be possible, delivered on platforms ranging from wireless phones and PDAs to traditional and notebook PCs. Additional interfaces such as WAP for lower bandwidth wireless connection will be used and maximized.

It can be understandable that European Commission has considered Internet market as a part of a wider market in the cases cleared until know. E-marketplaces provide additional supply routes and distribution channels which do not necessarily replace traditional economic structures. From the viewpoint of buyers and sellers they will continue to trade electronically and conventionally, and the electronic option is continuing to have a non majority share of trading volumes at least in the short time. E-marketplaces are currently a minor electronic trading option for most organisations in terms of volumes and percentages on sales and purchases compared with bi-lateral trading via e-business websites, Minitel and EDI . Indeed, e-service notion is not still totally developed and, even thought the technology exits, it is not being using in all its capacity by the participants because of another issues around the e-commerce.

However, in accordance with the criteria of the Commission explained above, when the development of e-marketplaces increases and e-service clearly constitutes a big different between one and the other way of selling, Internet market might be considered as a relevant market different to brick and mortar one.

Other possible questions are: Would it be relevant to distinguish between the general sector of e-commerce and the sub-segment of 2b2 e-commerce in some cases? Would it be even too early to draw any distinctions between b2b e-commerce in different industry segments?

In conclusion, whether e-commerce and "brick and mortar" commerce represent competing channels or separate markets is largely an empirical issue, which needs to be analysed on a case-by-case system.

3.4. Market power and concentration.

As we know, vertical agreements may contain certain restrictions to competition which, in the absence of significant market power by the companies involved, nevertheless generally improve production and distribution of the goods and services concerned. The safe harbour below 30% market share offers companies the freedom to create supply and distribution arrangements best suited to their individual commercial interests and to adapt to the changing economic conditions.

On one hand, main criteria to calculate significant market power must be adapted to the specific e-commerce reality.

On the other hand, what is proved is that e-marketplaces are structures characterised by important economies of scales where attractiveness increases proportionally to the number of participants doing transactions, either buyers or sellers. Thus, the trend will be moving to the e-markets with more traffic and number of participants. Increasing of the concentration will be also more immediate if b2b are built as buying or selling markets in an exclusivity basis, although even without exclusivity, an increasing of concentration is still foreseeable. If predictions of rise in economy efficiencies and participants satisfaction is real, there will be also a movement of sales from traditional market channels to e-marketplaces.

Therefore, foreseeing a double trend to concentration is reasonable in both senses: channelling of sales through e-marketplaces rather than traditional channels, and the consolidation of a limited number of e-marketplaces.

Some source have predicted an 80% fall-out through merger or failure by 2004. This could mean that only 100 or so viable e-marketplaces will survive in Europe. The European Commission is studying and trying to clarify how many market places are viable in a given industry .

In brief, competition issues become worse in concentrated markets. E-marketplaces tend to concentration and will be a scope with potential risk to damage free competition. All mergers and joint ventures built to create e-marketplaces have to be studied under horizontal co-operation agreements policies but what it is clear is that they also raise or will raise important consequences in a vertical level.

3.5. Article 4 of the Regulation (EC) 2790/1999: the hard-core restrictions

The Block Exemption Regulation does not apply to two sets of restrictions. The first set concerns the so-called hard-core restrictions of the article 4 of the Regulation (EC) 2790/1999. Companies are not allowed to use these restrictions in their agreements.

These restrictions are prohibited in order to maintain free price competition between distributors for the benefit of consumers and to guarantee the consumers' right to purchase goods and services wherever they want inside the Community. The Commission will strictly enforce these prohibition rules that can also be applied directly by national competition authorities and national courts. Violations of these rules can be fined and give rise to claims of damages.

3.5.1. Resale price maintenance (RPM): fixed and minimum resale price.

A producer may not impose on its distributors at which price to resell its products, for fixed and minimum RPM are forbidden. However, maximum and recommended prices are normally permissible, except when they act as implicit RPM. For instance, recommended resale price can act as implicit RPM if retailers fear refusal of supply if they price below the recommended price. This concern could potentially increase with e-commerce. The difficulties inherent in monitoring retail prices have traditionally made it difficult for suppliers to impose implicit RPM of this sort. Where e-commerce involves increased price transparency, the risk of such behaviour could increase, since suppliers will be able to monitor the retail prices being charged for its products cheaply and easily.

Because of transparency on the Web, the Internet also creates more of a problem with unauthorised distributors for the Internet presents an easy and cheap way for unauthorised distributors to sell products and services. Gray marketers can easily obtain access to pricing information and take advantage of price differentials, even if the price differentials are due to taxes and import duties.

It also worries the Commission that the provided information from distributor to producer might come in useful to the latter for trying to impose resale conditions or to control intracommunity trade flows. As a further service to the channel, many companies are now creating personalised e-service portals for their channel partners´customers branded with their “look-and-feel”. In other words, the producer maintains all the content and/or responds directly to the end-customer support questions, but it is all done from a set of Web pages that have the channel partners´s logo on them. This powerful marketing strategy gives channel partners, who may not have the resources to build their own complete e-service facilities, the ability to present an extremely impressive online face to their customers. By creating their channel relationships while ensuring that the ultimate end-users of their products receive the accurate, consistent information they need to make the most effective use of those products. This practice is likely to have competition consequences, in particular there is a potential risk of vertical exchanges of information. In such cases, sensitive information is the one from down to up rather than the one from up to down the channel distribution. Thus, legality of the introduction of an electronic field in the web site of a marketplace asking for the introduction of information about resale conditions will be at least uncertain. A possible solution to this issue are agreements between the participants regulating the nature and destination of the provided information.

Volbroker.com is the first e-marketplace cleared under Article 81 ECT. In this case, six major banks set up a joint venture offering an electronic brokerage service for trading foreign currency options. This case raised concerns regarding the access to confidential information by the parent companies. To deal with this concern, the owners of the Volbroker.com exchange gave certain assurances to the Commission. The commitment thus aims to build “Chinese walls” between the Joint Venture operating the exchange and the parent companies which are active as market participants. However, and going back to the vertical share of information –in Volbroker case the discussion was around horizontal share of information- the question is whether the technological and procedural safety measures are sufficient to prevent participants from seeing sensitive information from down to up the channel distribution.

An alternative form of resale price restriction that may emerge with e-commerce is refusal by suppliers to allow retailers to sell product in particular ways, such as via auction, that reduce the retailer´s director control over out-turn retail prices. Such a restriction could again be viewed as a way of achieving implicit RPM and so facilitating collusion .

Finally, there is another fact which could raise consumer protection issues. If you are a bricks and mortar retailer and someone else is operating your site under your name, if that independent entity has full pricing authority and you are not able to dictate the prices that will be offered on your web site, you are asking for a lot of trouble with your customers who are going to walk into your store and see different prices form what they saw on your site.

3.5.2. Selective and exclusive distribution: absolute territorial protection.

Under EC competition law, selective distribution would usually be exempted from Article 81 so long as the criteria adopted for choosing distributors is objective and qualitative, and there is no restriction placed upon passive sales by distributors within the system to other distributors´customers. By contrast, restrictions on active sales (where a supplier makes an active attempt to sell into the exclusive territory or to an exclusive customer group reserved to the supplier or allocated by the supplier to another buyer) are considered acceptable.

Disintermediation

The most common competition complaints in the e-commerce area currently relates to e-commerce operators being refused supply of products, when they are readily available to distributors in traditional sales channels. This potential antitrust issue arise from the so-called "disintermediation", a process where a manufacturer or a company basically tries to skip over the dealers and distributors and sell directly on line to the general consumer. Dell Computers is the most successful case of "non intermediation" within the one-to-many e-business model, but it is not actually a case of "disintermediation" since Dell Computer never really had a channel organisation or brick and mortar store organisation.

By refusing to supply online retailers, traditional suppliers try to reserve this niche for themselves, and it is possible that the disfavored traditional distributor could attack the b2b, which excluded it from the market, as a vertical exclusive dealing arrangement. For instance, the authorisation of the joint venture between Amadeus (a company controlled by airlines Air France, Iberia, and Lufthansa which operates a computerised reservation system –CRS-) and Terra (the Internet subsidiary of Telefónica) raised publicly comments of the travel agencies sector in Spain on their opposition to the new services that Amadeus will make directly available to end consumers through Internet .

Active and passive sales

Under EC competition law, we have seen that producer may not restrict its distributors selling to any customer if it is an unsolicited order (passive sales). This means that each distributor must be free to respond to a request for the product or service made by any customer inside the Community. Distributors must be thus left free to also use the Internet to respond to such requests.

Difference between e-commerce and traditional commerce raise difficulties for applying the same qualitative criteria to both traditional and e-commerce retailers. In addition, it is far from clear how one would distinguish an “active” from a “passive” sale in the context of e-commerce. The conditions employed for assessing selective distribution may therefore require refinement as e-commerce develops as a sales channel.

Territorial distribution issues

As we have already commented above, e-commerce can potentially widen geographical markets relatively dramatically. It creates a more competitive market, for e-tailers can now supply territorially wider markets. Vertical restraints such as exclusive distribution and exclusive dealing could therefore have several implications for the total number of online competitors world-wide, compared with their impact on the number of traditional competitors. This may in turn have an impact on the number of competitors in the traditional market. As customers become increasingly able to switch to the Internet in the absence of a local distributor, the number of local distributors may be reduced.

Widening of geographical markets is raising an important issue with the traditional practice of dividing markets territorially. If a distributor is authorised to sell the products in a specified territory and that distributor establishes an e-commerce web site in the territory that is accessible to customers outside the territory, potential problems exist irrespective whether the territory is an exclusive or non-exclusive territory. In the Playboy Enterprises, Inc. v Chuckleberry Publishing Co. case , U.S. Court had to deal with this territorial distribution problem. There the Italian defendant was required to: 1) either shut down its Internet site completely or refrain from accepting any new customers residing in the United States; 2) invalidate the user names and passwords to the Internet site previously issued to United States purchasers; and 3) revise its Internet site to indicate that any purchase requests from United States customers will be denied.

By now, some barriers to international trade remain and we may observe some seller-imposed constraints, designed specifically to maintain separate geographic markets, either to keep price differentiation by countries or to avoid jurisdictional issues. Most of current e-sellers are serving their customers in different countries from "local" web sites (e.g. www.euro.dell.com/countries/uk for the UK, www.euro.dell.com/countries/fr for France and www.dell.com for the US). Price differentiation is also possible if customers are required to register their address before receiving price information.

Discriminatory practices

In general, exclusive and discriminatory practices are against competition law. While exclusive practices are easily detectable, discriminatory practice are not so much. In e-marketplaces, ownership can raise competition problems in particular where an online marketplace is controlled by a number of market participants. These owner-participants could use the rules to exclude certain participants from the most efficient marketplace, thus putting them at a competitive disadvantage.

In the Volbroker.com case, the Commission has shown its concern about the possible anti-competitive effects of exclusive or discriminatory practices. In this sense, and regarding to vertical relationship, an issue of discrimination could arise, for example, if the founders-sellers alter platform software reducing functions of one or various participants-buyers, or provide them information of different quality, in the interests of other participants-buyers joint with the founder through any kind of partnership. To try to avoid this kind of discriminatory practices, it may be safe for a company to enter into a “most favored nation” contract with one of its suppliers, which guarantees that no other customer of that supplier will be treated more favorably than this company.

Legal cases relating to datable access might be helpful to presage the issues with B2B exchanges concerning to the importance of not restricting access to these Internet markets and the information post on them in a discriminatory or unfair manner. Technology standardisation is also of greatest importance to ensure non-discriminatory access to e-markets.

3.5.3. Exclusive or selective distribution combined with exclusive purchasing.

A producer applying a selective distribution system, for instance in the field of cosmetics, may neither restrict active nor restrict passive selling by the authorised distributors to end-users or other authorised distributors.

The main problem would be that a significant part of the potential participants within an specific sector link with an e-marketplace in an exclusive manner, blocking thus the development of alternative e-marketplaces around that same sector, for the latter could not obtain a good volume of transactions to keep themselves in the market. In this cases, as in any already known way of doing business, exclusive purchasing will even make it worse.

3.6. Article 5: Non-competition agreements

The second set of restrictions not covered by the new Regulation concerns certain restrictions which are not exempted but which may under certain circumstances nonetheless be compatible with the EC competition rules. The most important concerns non-compete obligations (requiring distributors to resell only the brands of one supplier) when their duration exceeds five years. Such agreements are not covered by the new Block Exemption Regulation as they may have a strong foreclosing effect on the market. These agreements may preclude the seller´s competitors from participation in the business under contract. The legality of these arrangements depends on a variety of factors and can only be determined on a case-by-case basis. In the Guidelines it is described under which circumstances long-term investments may justify a longer duration of non-compete obligations.

Let us think about an Internet site which is offering a multitude of products, and it wants to tie up its suppliers exclusively for a while to make its site unique, to differentiate it, to offer that value added. We must think also that e-marketplace participation require significant sunk investments. Buyers and sellers wishing to integrate their IT systems with an online marketplace may need to invest in systems which will then lock them into this marketplace. In such circumstances, there is a real risk that these investments has been made and the parties are tied in, the online marketplace could potentially raise the prices it charges for its services, such that the parties do not make the expected return on which they based their decision to invest. In such cases the parties may wish to protect their investments by putting in place long-term vertical agreements.

The big question is the always one in this cases: What is the reasonable duration of the exclusivity, how much foreclosure is there, and how much market power does the company have?

As we know, the justification of this type of clauses during the period of creation and launching of a new entity bases (e.g. the hold-up) on its necessity to achieve a certain volume of transactions to keep itself in the market, to get back sunk costs and to prevent the existence of free riders. In this sense, one might expect “hold-up” problems to be used frequently in e-commerce market as a justification for vertical restraints. In evaluating such problems, however, the competition authorities must take care to assess the degree made in “propietary” software could equally have been made in “open” systems that did not lock-in participants by the same degree, then the “hold up” problem might have been avoided. In such cases, it might perhaps be considered a poor justification for vertical restraints.

Anyway, we might bear in mind that a short-term exclusionary behaviour in the initial stages of e-commerce may have significant long-term effects on market structure. Many e-commerce markets are likely to exhibit large first-mover advantages, which may act significant barriers to entry to later market entrants .

3.7. Other vertical restraints aspects to comment

3.7.1. Free riding

With the e-commerce, a new kind of free riding arises. It is the so-called “reverse research” or “reverse free-rider argument” for being the reverse of the standard free-rider story heard in the analysis of vertical restraints. It consists in the fact that a lot of consumers do their research on the Internet, and then they purchase in a traditional physical store.

To study the new modes of free riding with the appearance of the Internet and e-commerce, it is good to distinguish between four types of products: 1) products that can be digitized and download (software, music, books); 2) commodities which you can buy off the Internet with a certain amount of assurance, and people like to hold and touch; 3) things where you need more information but people do not feel the need to go to a store and hold them and touch them; and 4) the small category of products like surgery that cannot be sold over the Internet because one has to go there .

Once the differentiation is made, it is important to notice that the “reverse free-rider argument” does not apply on all kind of products. For example, it does not apply in the case of commodities where it is just the setting of a price and you know what it looks like.

We can also go beyond the reverse argument and talk about other kind of new free riding; let us think for a moment about the following situation: a customer, after doing the Internet research, goes in and looks at the cars in the physical store, and then he/she decide to go back to the Internet and get the best price on the specific car that he/she has already free ridden off of the traditional automobile store.

3.7.2. Bundling

The term “bundling” can be referred to as package tie-in and tends to occur when one product is sold in proportion to another as a requirement for the sale. It is related to the concept of tied selling. For example, a computer manufacturer may require customers to purchase along with the computer all or a specified amount of ancillary products such as floppy disks and printing paper. Alternatively, the sale may be made as a complete package such as an automobile equipped with all options including automatic transmission, cassette-radio and air conditioning. Bundling of products may be a source of economies or efficiencies for the manufacturer, part of which may be reflected in a lower composite price for the buyer than if all the different products were supplied or bought separately .

However, bundling may also make it difficult for firms to enter different product segments of the market. In some cases, the antitrust laws prohibit an agreement in which a seller requires a buyer to buy one (usually less desired or desirable) product or service (the “tied product”) in order to obtain another (usually more desired or desirable) product or service (the “tying product”). By contrast, it is not illegal to combine the sale of different or separate goods or services in a package at a particularly favorable price, as long as the customer has the realistic choice of purchasing the individual foods or services separately. The competition implications of bundling, including that of tied selling, generally are complex and need to be evaluated on a case by case basis adopting a rule of reason approach.

What is possible in the virtual market and it was not in the traditional market is using bundling practices to pirate clients. Some retailers are claiming that producers are using hyperlinks contained in products sold by retailers to pirate the retailer´s customers. The National Association of Recording Merchandisers in the United States is claiming that Sony is using links on the Sony CDs the retailers sell to direct the customers to Sony Internet Music Retail sites owned or controlled by Sony. The retailers are claiming that the embedded link to Sony is an unlawful tying arrangement in violation of the U.S. Federal Antitrust laws since Sony will not sell CDs to the retailers without the links. The retailers are claiming that their customers will no longer visit the store to make their purchases because of the alleged unlawful bundling practices of Sony .

3.7.3. New illegal uses of trademark licences

Tipically, distribution agreements authorise the distributor to use the producer´s trademark for purposes of the distribution agreement. If the trademark licensee uses the licensed trademark on its web site to attract visitors and generate revenues other than the revenues on the licensed products, there may be an issue over whether the licensee is commercially exploiting the licensed trademark in an unauthorised manner.

In a trial regarding this issue, the US court found that the defendants were using their licensed trademark to attract visitors to their web site and then to direct this traffic to other sites, through linking and framing, for commission revenue on the sale of unlicensed products not bearing the licensed trademark. This is just one example of the kind of issues that may arise in connection with trademark licenses. The use of licensed trademarks in connection with distribution over the Internet need to be considered carefully.

IV. CONCLUSION

- The traditional arrangements that work pretty nice in traditional channels no longer work. Distribution techniques are likely to change in the e-commerce world.

- When we work through the legal issues, it is very important to think about the kind of distribution and products that will be traded on the Internet and to bear in mind that the nature of the product really makes a difference in terms of the kind of structure.

- Technical interoperability is necessary to ensure e-marketplaces good and smooth functioning. Without standards the efficiency of e-marketplaces will be limited and networking benefits and critical mass may never be achieved. Compatibility between the different technologies of each e-market will be possible thanks to the “middleware” applications, which enable integration of applications and equipment working under different operating systems and/or standards.

- Consolidation of e-marketplaces is already occurring. European Union is promoting open and neutral platforms for electronic exchanges. The main challenge is to increase the number of suppliers of goods and services participating in the e-marketplaces. This requires a balance of interest and mutual trust. September, 11 terrorist attacks in New York and Washington have opened the polemic about the convenience of forbidding encryption. Trust in e-commerce lies in the security of transactions which is mainly supported on cryptography. Even so, experts are not pessimistic on the future growth of the e-commerce market.

- Competition rules are economic rules that by their very nature involve a certain degree of legal uncertainty. Companies holding market power are exposed to the risk of violating the competition rules. As every field under competition law, all this issues will have to shake out on a case-by-case basis. A lot of the key fundamental economic issues can be the same, and the “constitutional principles” are still valid. However, the technology, the antitrust, the economics and the legal technology really needs to step up because we do not have a good enough handle in the e-commerce field as we have on traditional types of businesses. The key question is whether current provisions need to be more focused to deal with the particular conditions anticipated in e-commerce, and specially in e-marketplaces. In this sense, new Guidelines focused on this new reality would be really helpful.