Introduction

Vertical agreements are concluded between companies at different levels of the supply chain. They are widely used when there are frequent vertical business interactions. Few firms produce inhouse all their required inputs and are active in all stages of the production process, up to and including the specialised distribution of the final goods and services. Vertical agreements between independent firms can often create cost efficiencies, enhanced production efficiency, or an improved allocation of products on the market. In particular, they can help prevent double mark-ups, free-riding among either producers or retailers, and the promotion of investments in service and the certification of quality. Vertical agreements are therefore common and efficient in many production chains.

Vertical agreements may, however, also restrain trade and so have anticompetitive effects. The imposition of maximum prices, for example, may protect downstream market power. Vertical restraints are also known to restrict entry for new competitors – for instance, by preventing access to distributors – and reduce either intrabrand or interbrand competition, or both. These anticompetitive effects of vertical agreements are discussed in the literature and have been identified by competition authorities including the European Commission.

To assess the possible anticompetitive effects of vertical agreements properly, it is important to understand the type and degree of competition at all relevant levels of the production chain. Indeed, the restrictive effects of vertical restraints are typically produced horizontally from one layer of production to another.