Glossary term
Vertical Restraints
Subject: Compliance and Regulation, Competition and Antitrust
Also known as: Vertical Agreements
Vertical restraints are limits that firms at different levels of a supply chain, such as a manufacturer and its distributors, place on each other, for example on resale prices, territories or exclusivity.
Explanation
Unlike a cartel between rivals, a vertical agreement links a supplier with a buyer. Many are harmless or helpful: exclusive distribution can encourage a dealer to invest in promotion. They raise concern when the supplier or the buyer has market power and the restriction shuts out rivals or keeps prices high. Typical restraints are exclusive supply or purchasing, territorial and customer limits, selective distribution, tying, non-compete clauses and limits on online sales. Resale price maintenance (RPM) is the best-known form: the supplier fixes or sets a floor for the price at which a reseller sells. The EU and many other regimes treat RPM as a serious restriction, while courts in the United States judge it case by case. Many jurisdictions publish block exemptions or safe harbours, usually tied to market share. A supplier drafting dealer contracts checks each clause against the local safe harbour before relying on it.
Example
A premium headphone maker tells its online retailers not to advertise below a stated price and threatens to cut supply to anyone who does. A discount retailer complains. The authority treats the instruction as resale price maintenance and asks the maker to withdraw it and to rewrite its distribution contracts.
Not to be confused with
- Price Fixing
- Price fixing is an agreement between competitors. Vertical restraints bind companies at different stages of supply and are assessed with more attention to context.