by
Philippe Brusick

Firm A
Suppliers
Firm B
Suppliers
Manufacturer A Manufacturer B
Wholesalers Wholesalers
Retailers Retailers
Consumers

• Vertical restraints include restrictive agreements between suppliers and a manufacturer
(upstream) and between a manufacturer and his distributors (downstream), as can be viewed on the figure above.
• The agreement is vertical, while an agreement between manufacturers A and B would be horizontal.
• Numerous cases of vertical restraints exist in business life.

• Upstream, between suppliers and manufacturers, exclusivity agreements;
• Downstream, between manufacturers and wholesalers, resale price maintenance, exclusive distribution contracts and fixed margins;
• Between manufacturers/wholesalers/importers and retailers, resale price maintenance, discount prohibition, tied selling, reciprocal exclusivity contracts, etc.

• Territorial exclusivity agreements
• Reciprocal exclusivity arrangements
• Year-end rebates
• Resale price maintenance
• Tied sales; full-line forcing
• Transfer-pricing (over- or under-invoicing)
• Below-cost sales (dumping)
• Refusal to deal (boycot).

• Most often, these are normal business relations, such as territorial exclusivity, which are not anti-competitive.
• They stem from the desire of the manufacturer to ensure the quality of service and after-sales services for his brand of products
• The distributor, or agent, will require exclusivity so that he can make important investments for the brand he represents, with assurances he will not be cheated by
« free-riders » selling the same brand nearby without having incurred heavy investments.
• Competition problems occur especially in case of abuse of dominance.

• An oft- used arrangement concerns end-of year rebates given on the condition the retailer does not sell any competing goods
• In case the supplier is a dominant firm, such a practice might result in eliminating competition.

• The manufacturer fixes the price his products must be sold by retailers
• He thus controls resale margins and prohibits rebates
• RPM is often prohibited by competition law but exceptions exist in some countries, for example in the fields of books, medicines and luxury products such as perfumes.

• When prices vary from one country to another, independent resellers are tempted to import and sell at lower price than official agent
• The manufacturer (or his agent) can apply trademark law to block such unauthorised imports
• For expensive products (eg cars) it can attempt to block private parallel imports
• Problem in case of dominance….

• A manufacturer obliges his distributors to hold minimum stocks or even all his product line (Full-line-forcing)
• A distributor refuses to sell one product indipendently from another (eg selling a computer without software included).
• Reseller may impose large quantities sale on concumer
• Problem in case of dominance…

• Involves over-invoicing imported inputs from a subsidiary or mother firm of a TNC in order to declare less profit and evade remittances and tax.
• Otherwise, involves under-invoicing imported inputs from a sister company to reduce cost and sell at lower price than competitors in order to eliminate them (see predatory practices and loss-selling).

• Dominant firms may apply predatory prices (similar to dumping) to harm their competitors
• Under-invoicing is one of the predatory practices used by multinationals to this effect
• In international trade relations dumping is challenged by anti-dumping duties.

• Vertical restraints such as those described above are usually imposed under the threat of reusal to deal anymore in case of breach by the resaler.
• An exclusivity agreement involves such a refusal to deal with competitors
• As for most vertical restraints refusal to deal is usually anti-competitive when applied by a dominant firm or a monopoly.

• It is clear that different stages of the productiondistribution chain can be owned by a single vertically integrated firm, giving that firm increased dominant power which may turn to be anti-competitive
• Vertical restraints can be imposed by a dominant firm upstream (essential input), by a manufacturer, or downstream (eg large retail chain imposing restraints on suppliers).

• Except for RPM, which always pose anticompetitive problems (although opinions diverge on this matter, see Chicago
School)…
• Most vertical restraints have anticompetitive effects only when applied by a dominant firm or by a monopoly.

1. Does the agreement restrain competition by:
Increasing barriers to entry? Facilitating pricediscrimination? Monopolising another product?
Facilitating an agreement between producers or distributors? Increasing costs of competitors?
2. Does the agreement have any pro-competitive aspects?
3. One must weigh pros & cons before deciding.

philippe.brusick@gmail.com
www.prbrusick.org