Ver­ti­cal Re­straints in agree­ments

Fiji Sun - - Business - Bobby Ma­haraj

This week’s ar­ti­cle fo­cuses on ver­ti­cal re­straints. It higlights the im­por­tance of con­ducts that are re­stricted un­der the Fiji Com­merce Com­mi­sion De­cree(2010) and the types of ver­ti­cal re­straints.

What are Ver­ti­cal Re­straints?

Ver­ti­cal re­straints are com­pe­ti­tion re­stric­tions in agree­ments be­tween firms or in­di­vid­u­als at dif­fer­ent lev­els of the pro­duc­tion and dis­tri­bu­tion process and are per se a Re­stric­tive Trade Prac­tice un­der the Com­merce Com­mis­sion De­cree 2010.

Ver­ti­cal re­straints are to be dis­tin­guished from so-called “hor­i­zon­tal re­straints”, which are found in agree­ments be­tween hor­i­zon­tal com­peti­tors.

Ver­ti­cal re­straints can take nu­mer­ous forms, rang­ing from a re­quire­ment that deal­ers ac­cept re­turns of a man­u­fac­turer’s prod­uct, to re­sale price main­te­nance agree­ments set­ting the min­i­mum or max­i­mum price that deal­ers can charge for the man­u­fac­turer’s prod­uct.

What are Ver­ti­cal Agree­ments?

Ver­ti­cal agree­ments are those that arise in a chan­nel of dis­tri­bu­tion be­tween firms at dif­fer­ent lev­els of trade or in­dus­try i.e. be­tween a man­u­fac­turer and whole­saler or be­tween a sup­plier and his cus­tomer. Ver­ti­cal agree­ments serve to co­or­di­nate the ac­tions of an up­stream firm and a down­stream firm and they may well be wel­fare. wel­fare im­prov­ing in view of the com­ple­men­tary na­ture of the re­la­tion­ship.

It is usu­ally seen as con­di­tions that an up­stream pro­ducer im­poses on its down­stream dis­trib­u­tors. Ver­ti­cal Re­straints can be detri­men­tal for con­sumers, es­pe­cially when they ex­clude ri­val firms from the market or fa­cil­i­tate col­lu­sion among them.

At one ex­treme, ver­ti­cal re­straints have been viewed as tools em­ployed sys­tem­at­i­cally to dis­tort com­pe­ti­tion and re­duce

More specif­i­cally, these re­straints are al­legedly put in place by man­u­fac­tur­ers and dis­trib­u­tors to re­duce com­pe­ti­tion and to raise en­try bar­ri­ers for com­pet­ing prod­ucts so as to in­crease profit mar­gins, at the ex­pense of con­sumers and so­ci­ety at large. At the other ex­treme, all ar­range­ments be­tween par­ties at dif­fer­ent stages of the ver­ti­cal chain have been con­sid­ered as pos­i­tively con­tribut­ing to the ef­fi­cient pro­duc­tion and dis­tri­bu­tion of goods and ser­vices.

Types of Ver­ti­cal Re­straints

A wide range of ver­ti­cal re­straints can be found in all economies, be­ing very of­ten em­ployed in a bun­dle. Among the most widely used but not lim­ited to the fol­low­ing:

a) re­sale price main­te­nance;

b) re­fusal to deal;

c) ex­clu­sive deal­ing;

d) ter­ri­to­rial ex­clu­siv­ity;

e) quan­tity fix­ing;

f) tie-in sell­ing;

g) full line forc­ing.

Re­sale price main­te­nance (or ver­ti­cal price-fix­ing)

refers to an ar­range­ment whereby the man­u­fac­turer sets the price dis­trib­u­tors are al­lowed to charge for the re­sale of the prod­uct or ser­vice. Of­ten, sim­ply a max­i­mum (price ceil­ing) or min­i­mum (price floor) price is set, thus al­low­ing for greater flex­i­bil­ity to down­stream firms in their pric­ing de­ci­sion. Also, in many cases, rather than im­posed, a “rec­om­mended price” is sim­ply sug­gested to the re­tailer, who still main­tains the fi­nal say on the price charged to fi­nal con­sumers.

In any event, it can be noted that re­tail­ers may cut prices also by pro­vid­ing more favourable con­di­tions for the terms of pay­ment, de­liv­ery charges, etc.

Re­fusal to deal refers to the prac­tice of re­fus­ing to sup­ply a prod­uct to a pur­chaser, of­ten a re­tailer or whole­saler. It is of­ten used to en­sure com­pli­ance with re­quire­ments aimed at fix­ing re­sale prices. For ex­am­ple, a man­u­fac­turer of steel lim­its whole­sale sup­plies to cer­tain hard­ware out­lets and re­fuses to sup­ply other com­peti­tor hard­ware out­lets. In such a case, the prices of other com­pet­ing hard­ware out­lets will be higher than com­pet­ing hard­wares to whom the man­u­fac­turer sup­plies di­rectly as they will have to buy from these hard­ware out­lets to sell.

Ex­clu­sive deal­ing oc­curs when dis­trib­u­tors are re­quired to carry only the goods sup­plied by a given man­u­fac­turer and are not al­lowed to sell com­pet­ing brands. Ex­clu­sive deal­ing, taken as a generic term, may re­fer to dif­fer­ent ver­ti­cal re­straints such as ter­ri­to­rial ex­clu­siv­ity, re­fusal to deal, etc. For in­stance, a bot­tled wa­ter com­pany im­poses a con­di­tion that they will only sup­ply to a su­per­mar­ket on a con­di­tion that the su­per­mar­ket does not sell com­pet­ing brands. An­other ex­am­ple of such con­duct in Fiji is when the schools have an ex­clu­sive ar­range­ment with man­u­fac­turer of uni­forms for the sup­ply of uni­forms or spec­ify a par­tic­u­lar brand of sta­tionery in the sta­tionery list.

Quan­tity fix­ing refers to ver­ti­cal con­trac­tual ar­range­ments es­tab­lish­ing the quan­tity of goods re­tail­ers are re­quired to buy from the man­u­fac­turer. When the de­mand fac­ing the re­tailer is known and di­rectly linked to the fi­nal price, quan­tity fix­ing can be very sim­i­lar to re­sale price main­te­nance; par­ties may sim­ply agree on a max­i­mum or min­i­mum quan­tity pur­chased. This can be demon­strated when the man­u­fac­turer of a par­tic­u­lar prod­uct lim­its sup­ply by con­trol­ling quan­tity sup­plied to main­tain a par­tic­u­lar price level.

Con­tin­ued Next Week...

Bobby Ma­haraj is the chief ex­ec­u­tive of the Fiji Com­merce Com­mis­sion. This is a reg­u­lar col­umn from the Com­mis­sion in the Fiji Sun.

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