Vertical Restraints In Agreements
This week’s article focuses on vertical restraints. It highlights the importance of conducts that are restricted under the Fiji Commerce Commision Decree(2010) and the types of vertical restraints.
What are Vertical Restraints?
Vertical restraints are competition restrictions in agreements between firms or individuals at different levels of the production and distribution process and are per se a Restrictive Trade Practice under the Commerce Commission Decree 2010.
Vertical restraints are to be distinguished from so-called “horizontal restraints”, which are found in agreements between horizontal competitors.
Vertical restraints can take numerous forms, ranging from a requirement that dealers accept returns of a manufacturer’s product, to resale price maintenance agreements setting the minimum or maximum price that dealers can charge for the manufacturer’s product.
What are Vertical Agreements?
Vertical agreements are those that arise in a channel of distribution between firms at different levels of trade or industry i.e. between a manufacturer and wholesaler or between a supplier and his customer.
Vertical agreements serve to coordinate the actions of an upstream firm and a downstream firm and they may well be welfare improving in view of the complementary nature of the relationship.
It is usually seen as conditions that an upstream producer imposes on its downstream distributors. Vertical Restraints can be detrimental for consumers, especially when they exclude rival welfare.
More specifically, these restraints are allegedly put in place by manufacturers and distributors to reduce competition and to raise entry barriers for competing products so as to increase profit margins, at the expense of consumers and society at large.
At the other extreme, all arrangements between parties at different stages of the vertical chain have been considered as positively contributing to the efficient production and distribution of goods and services.
Types of Vertical Restraints
A wide range of vertical restraints can be found in all economies, being very often employed in a bundle. Among the most widely used but not limited to the following:
- a) resale price maintenance;
- b) refusal to deal;
- c) exclusive dealing;
- d) territorial exclusivity;
- e) quantity fixing;
- f) tie-in selling;
- g) full line forcing.
r Resale price maintenance (or vertical price-fixing) refers to an arrangement whereby the manufacturer sets the price distributors are allowed to charge for the resale of the product or service.
Often, simply a maximum (price ceiling) or minimum (price floor) price is set, thus allowing for greater flexibility to downstream firms in their pricing decision.
Also, in many cases, rather than imposed, a “recommended price” is simply suggested to the retailer, who still maintains the final say on the price charged to final consumers.
In any event, it can be noted that retailers may cut prices also by providing more favourable conditions for the terms of payment, delivery charges, etc.
r Refusal to deal refers to the practice of refusing to supply a product to a purchaser, often a retailer or wholesaler.
It is often used to ensure compliance with requirements aimed at fixing resale prices. For example, a manufacturer of steel limits wholesale supplies to certain hardware outlets and refuses to supply other competitor hardware outlets.
In such a case, the prices of other competing hardware outlets will be higher than competing hardwares to whom the manufacturer supplies directly as they will have to buy from these hardware outlets to sell.
r Exclusive dealing occurs when distributors are required to carry only the goods supplied by a given manufacturer and are not allowed to sell competing brands.
Exclusive dealing, taken as a generic term, may refer to different vertical restraints such as territorial exclusivity, refusal to deal, etc.
For instance, a bottled water company imposes a condition that they will only supply to a supermarket on a condition that the supermarket does not sell competing brands.
Another example of such conduct in Fiji is when the schools have an exclusive arrangement with manufacturer of uniforms for the supply of uniforms or specify a particular brand of stationery in the stationery list.
r Quantity fixing refers to vertical contractual arrangements establishing the quantity of goods retailers are required to buy from the manufacturer.
When the demand facing the retailer is known and directly linked to the final price, quantity fixing can be very similar to resale price maintenance; parties may simply agree on a maximum or minimum quantity purchased. This can be demonstrated when the manufacturer of a particular product limits supply by controlling quantity supplied to maintain a particular price level.
Continued Next Week…
Bobby Maharaj is the chief executive of the Fiji Commerce Commission. This is a regular column from the Commission in the Fiji Sun.
