BUSINESSWEEK ONLINE : DECEMBER 11, 2000 ISSUE
BUSINESS WEEK E.BIZ -- CUTTING EDGE Don't Cheat, Children In the brave new e-tail world, collusion is all too possible With Internet consolidation in full swing, early fears that a few large companies would dominate online commerce may be coming true. That's worrisome enough for rivals of eBay (EBAY) in auctions, Amazon.com (AMZN) in e-tailing, or Covisint in automobile e-marketplaces, to name a few. But consumers like us should worry even more. The potential for collusion is rearing its ugly head. And I see no sure way to stop it. Here's the problem: The Internet allows for massive information to be gathered in real time. Often, that's great for buyers. But not always. If there are only a few dominant sellers, they can act on that information faster than buyers. Then, notes University of California at Berkeley Professor Hal R. Varian, they can match each other's price cuts instantly--vaporizing the extra business the price cut was supposed to bring. Eventually, that will tend to discourage them from discounting, and prices will gradually rise. A 1999 study by one of his students, Martin Dillard, found such a pattern in the prices for a sample best-selling book sold by Amazon.com and Barnesandnoble.com Inc. (BNBN) When bn.com matched Amazon's initial higher price, Amazon raised its tag even higher. But when bn.com then dropped its price, Amazon didn't follow. It held steady, and bn.com soon raised its price again. With limited competition, says Varian, ''the easier it is to monitor the other firms' behavior, the easier it is to support a collusive outcome.'' Now, I'm not accusing Amazon or Barnesandnoble.com of collusion. That requires proof of an agreement, says Jonathan Baker, associate law professor at American University, and I'd be surprised if their executives even want to talk to one another. But that's the point. They and other dominant e-tailers could tacitly collude without ever talking, simply by acting on readily available data--perhaps using software to automate price-matching. Similar collusion has happened before. In 1992, the Justice Dept. sued several airlines, accusing them of temporarily posting new prices on their shared reservation system as a way to test the responses of rivals and avoid fare cuts. A 1994 consent decree required them to change how they post prices on the system. Of course, they got caught, didn't they? Indeed, it's possible that the Net might make policing easier by providing the world's most complete audit trail for regulators. But don't count on it. Early this year, officials at the online industrial auctioneer FreeMarkets Inc. (FMKT), which closely monitors bid activity, caught a clear case of collusion: An electronics component supplier, whom they were guiding through an auction bid over the phone, was recorded discussing prices with another supplier. FreeMarkets notified the buyer, whose complaint spurred a Justice Dept. investigation of the supplier. Sighs FreeMarkets President David J. Becker: ''You've got an environment ripe for collusion.'' FreeMarkets, which has seen other examples as well, has the right idea: To guard against collusion, it sets up detailed rules and logs all activity, and it will remove offending bids if necessary. It also has a penalty box that keeps violators from participating in auctions for six months or more after they break any rules. For now, the Federal Trade Commission has decided to let e-marketplaces sort it out themselves, and the issue hasn't yet come up for e-tailers. The potential for complacency, though, worries some watchdogs. ''The risk is collusion in the open air instead of a smoky room,'' says Albert A. Foer, president of the American Antitrust Institute. I don't think new laws are necessary. Cheating is cheating, online or off. But unless regulators are extra-vigilant about online collusion, the Internet won't remain the buyer's paradise everyone had hoped. By ROBERT D. HOF, rob_hof@ebiz.businessweek.com _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					e.biz Contents for Dec. 11, 2000 issue INTERACT E-Mail to Business Week Online

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