Vertical agreements are contracts or agreements made between two or more businesses along the supply chain, where the businesses are at different levels of the chain. In other words, a vertical agreement is an agreement made between a supplier and a distributor or between a manufacturer and a retailer. These agreements are important in regulating the relationships between the different businesses in the supply chain and can impact competition and consumer welfare.
In the United Kingdom, vertical agreements are subject to competition law, which aims to protect consumers by promoting competition between businesses. The Competition and Markets Authority (CMA) is responsible for enforcing competition law in the UK and has the power to investigate and take action against businesses that breach the law.
Vertical agreements can have both positive and negative effects on competition, depending on their nature and the market conditions in which they operate. For instance, vertical agreements can lead to efficiencies in the supply chain, such as lower transaction costs, better coordination between businesses, and improved product quality. These efficiencies can benefit consumers by reducing the costs of goods and services.
However, vertical agreements can also have negative effects on competition. For example, if a supplier restricts a distributor from selling to other retailers, this can reduce competition between retailers, leading to higher prices for consumers. Similarly, if a manufacturer imposes minimum resale prices on its retailers, this can also restrict competition, as it prevents retailers from undercutting each other on price.
To ensure that vertical agreements do not harm competition, the CMA has issued guidelines on the assessment of such agreements. These guidelines outline the types of vertical agreements that are likely to breach competition law, such as agreements that contain resale price maintenance (RPM) or exclusivity clauses.
RPM occurs when a supplier or manufacturer sets a minimum resale price for its products, preventing retailers from selling the products below that price. RPM can reduce competition by preventing retailers from competing on price and can lead to higher prices for consumers. Exclusivity clauses, on the other hand, prevent retailers from selling a supplier`s products alongside those of its competitors. This can also reduce competition by limiting consumer choice and preventing new suppliers from entering the market.
In conclusion, while vertical agreements can bring benefits to businesses and consumers, they can also harm competition if they contain clauses that restrict competition. The CMA`s guidelines provide a framework for assessing the impact of vertical agreements on competition and ensuring that they comply with the law. As a result, businesses need to be aware of the competition law implications of any vertical agreements they enter into, to ensure that they do not breach competition law and harm consumers.