Vertical agreements. Agreements for the sale of goods or the provision of services between companies operating at different levels of the production or distribution chain are subject to a higher level of scrutiny as regards their anti-competitive effects. Typical examples of vertical agreements are distribution contracts, manufacturing contracts, long-term supply agreements and commercial agency contracts.
Vertical restraints. Normally, vertical agreements that simply determine the price and quantity for a specific sales transaction or for a specific period of time do not restrict competition. However, if a contract contains restraints on the supplier or the customer, it may be deemed to have anti-competitive effects. These ‘vertical restraints’ may also have positive effects.
For example, in context affecting the EU market, vertical restraints may be justified for a limited period in the following cases:
- A manufacturer wants to enter a new geographic market and thereby requires certain upfront investments by the distributor to establish the brand in the market;
- Transfer of know-how because it cannot be taken back once it has been provided, and the provider of it may not want it to be used for, or by, its competitors;
- In order to achieve economies of scale and low retail prices, a manufacturer may need to concentrate the resale of its product on a limited number of distributors;
- Client-specific investments which have to be made by either the supplier or buyer, such as investments in special equipment or training;
- A manufacturer increases sales by imposing a certain measure of uniformity and quality standardisation on its distributors or franchisees. This enables it to create a brand image and attract consumers.
EU competition law aims to prevent the following negative effects on the market that may result from vertical restraints:
- Anticompetitive foreclosure of other suppliers or other buyers;
- Reduction of competition or facilitation of collusion between the supplier and its competitors;
- Reduction of competition or facilitation of collusion between the buyer and its competitors;
- Limitations on the freedom of consumers to buy goods or services in another EU member state.
Example 1: alternatives. Agreements of an exclusive nature are generally worse for competition than non-exclusive arrangements. For example, under a non-compete obligation the buyer would be permitted to purchase only one brand. Alternatively, a minimum purchase requirement may permit a buyer to purchase competing goods, which reduces the degree of foreclosure.
Example 2: brands vs. white-label products. Vertical restraints agreed for white-label products are in general less harmful than restraints affecting the distribution of branded products. The distinction between non-branded and branded products will often coincide with the distinction between intermediate products and final products.