Vertical agreements are agreements that are entered into between businesses operating at different levels of the supply chain. Typically, a vertical agreement would be an agreement between a manufacturer and wholesaler or between a wholesaler and retailer. Vertical agreements play an important role in the economy, as they can lead to increased efficiencies and lower prices for consumers. However, they can also have anti-competitive effects, which is why they are subject to regulation.
Vertical agreements can have a number of anti-competitive effects. For example, they can be used to restrict competition between suppliers at different levels of the supply chain. This can lead to higher prices for consumers and reduced innovation by suppliers. Vertical agreements can also be used to limit the ability of downstream firms to compete with each other. This could involve the imposition of resale price maintenance, where a supplier sets a minimum price for its products. This can limit price competition between retailers and reduce consumer choice.
To address these anti-competitive effects, vertical agreements are subject to regulation under competition law. The law varies depending on the jurisdiction, but in general, vertical agreements are subject to the same rules as horizontal agreements (i.e. agreements between competitors). This means that vertical agreements that are anti-competitive may be prohibited or subject to conditions imposed by competition authorities.
The EU has a specific framework for the regulation of vertical agreements under Article 101 of the Treaty on the Functioning of the European Union. Under this framework, vertical agreements may be exempted from the prohibition on anti-competitive agreements if they meet certain criteria. The criteria relate to the market share of the parties to the agreement and the nature of the agreement itself. For example, an agreement may be exempted if it is unlikely to have anti-competitive effects or if the benefits to consumers outweigh any negative effects.
In the US, vertical agreements are subject to the rule of reason analysis under the Sherman Act. This means that the courts will assess whether the agreement has a pro-competitive or anti-competitive effect on the market. If the agreement has anti-competitive effects, it may be prohibited or subject to conditions.
Overall, the regulation of vertical agreements is an important tool for ensuring competition in the economy. While vertical agreements can have pro-competitive effects, they can also have anti-competitive effects. By subjecting vertical agreements to competition law, competition authorities can ensure that consumers are not harmed by these agreements and that the benefits of competition are maintained.