Vertical agreement
Topic: Market Structures, Market Failure and Competition · NCERT: Beyond NCERT
Meaning
A vertical agreement is an agreement between firms at different levels of the supply chain, such as a manufacturer and a distributor or a supplier and a retailer. Section 3(4) of the Competition Act 2002 lists five types:
- Tie-in: buy one product and you must also buy another.
- Exclusive supply: the buyer may buy only from one supplier.
- Exclusive distribution: a supplier limits sales to certain areas or dealers.
- Refusal to deal: a firm refuses to supply or buy from certain parties.
- Resale price maintenance: the supplier fixes the price at which retailers must resell.
These are judged under the "rule of reason". The CCI must show an appreciable adverse effect on competition (AAEC), because such deals can also bring efficiencies.
Example
Suppose a car maker requires its dealers to buy spare parts only from it and to refuse other suppliers. That is a vertical agreement. It becomes illegal only if the CCI finds that it shuts out rivals and harms competition.
Don't confuse with
- Horizontal agreement: this is among competitors at the same stage, such as a cartel. Such agreements are presumed to cause AAEC, while vertical ones need proof of harm.
Related concepts
- Anti-competitive agreements
- Appreciable adverse effect on competition
- Horizontal agreement
- Bid rigging
- Resale price maintenance
- Leniency programme
- Dominant position
- Relevant market
- Abuse of dominance
- Predatory pricing