Vertical Agreements form an integral part of the Indian Competition Act 2002 and play a crucial role in regulating business practices between enterprises at different levels of the supply chain. These agreements involve relationships between manufacturers, wholesalers, distributors, and retailers, and they have the potential to impact market competition and consumer welfare.
Understanding the concept and implications of vertical agreements under the Indian Competition Act is essential to ensure fair trade practices, promote competition, and safeguard the interests of consumers in India.
In this law note, we explore the definition of vertical agreements, their types, and enforcement, shedding light on their significance in shaping the Indian business landscape.
What Are Vertical Agreements
Vertical Agreements are contracts, arrangements, or understandings between enterprises operating at different production or distribution chain levels.
These agreements establish the terms and conditions under which the parties cooperate and interact. Vertical agreements typically involve relationships between manufacturers, wholesalers, distributors, and retailers, and they may cover various aspects, such as pricing, territorial restrictions, exclusive distribution, and resale price maintenance.
Related Law Note: Horizontal Agreements With Types, Fines, and Exemptions
Example of a Vertical Agreement
Let’s delve into a scenario where Company A, a leading manufacturer of electronic gadgets, and Company B, a nationwide distributor with an extensive network, decide to enter into a vertical agreement.
In this agreement, Company A agrees to supply its electronic gadgets exclusively to Company B, granting the distributorship rights.
In return, Company B commits to promoting, marketing, and selling the electronic gadgets to retailers and end consumers within the specified geographic area. This vertical agreement outlines the terms and conditions that govern the relationship between the manufacturer and the distributor, illustrating a classic case of vertical integration in the business supply chain.
Vertical agreements are defined under section 3(4) of the Indian Competition Act, 2002. This section deals with anti-competitive agreements between enterprises operating at different production or distribution chain levels.
It outlines the types of vertical agreements that may have an Appreciable Adverse Effect on Competition (AAEC) and are subject to scrutiny and prohibition under the Act.
The Competition Commission of India (CCI) evaluates vertical agreements to ensure they comply with competition laws and do not lead to anti-competitive effects in the market. By defining vertical agreements under section 3(4), the Act establishes clear guidelines for businesses to follow fair trade practices and promotes healthy competition in the Indian market.
Related: What Is Predatory Pricing? A Conceptual Analysis
Types of Vertical Agreements
Here are the five different kinds of vertical agreements.
1. Tie-in-arrangement
A tie-in arrangement, also known as tying or product bundling, is a type of vertical agreement where a seller conditions the sale of one product (the tying product) on the purchase of another product (the tied product). In this arrangement, the buyer must buy both products together as a package, and they cannot purchase the tied product separately.
Tie-in arrangements can be lawful or unlawful, depending on their impact on competition in the market. Lawful tying occurs when it is beneficial to consumers or promotes efficiency. For example, offering a printer with the purchase of a computer can be advantageous as it ensures compatibility and simplifies the buying process for customers.
However, tying can be considered anti-competitive and unlawful when it harms competition, restricts consumer choice, or forecloses competitors from the market. For instance, if a dominant company in the software industry forces customers to buy its software package along with its operating system, it may hinder competition and limit consumer options, raising concerns under competition laws.
Under the Indian Competition Act, tie-in arrangements that have an appreciable adverse effect on competition are considered anti-competitive and prohibited under section 3(4). The Competition Commission of India (CCI) evaluates such arrangements to ensure they do not harm fair competition and consumer welfare in the market.
2. Exclusive Supply Agreement
An exclusive supply agreement is a vertical agreement between a supplier and a buyer where the supplier agrees to sell its products exclusively to the buyer, and the buyer agrees to purchase the products exclusively from the supplier. Under this arrangement, the buyer is restricted from purchasing the same or similar products from any other supplier, and the supplier is prohibited from selling the products to any other buyer in the defined market.
While exclusive supply agreements are not per se illegal, the Competition Commission of India (CCI) examines them on a case-by-case basis to determine their impact on competition. If such agreements restrict competition, foreclose competitors from the market, or lead to higher consumer prices, they may be deemed anti-competitive and prohibited under the Act.
However, exclusive supply agreements can also have pro-competitive effects in certain cases. For example, they may promote efficiencies in the supply chain, enable manufacturers to invest in customized products or ensure product quality and compatibility.
To assess the compliance of exclusive supply agreements with the competition law, the CCI evaluates factors such as the parties’ market power, market structure, entry barriers, and potential effects on competition and consumer welfare. The CCI aims to strike a balance between promoting fair competition and allowing legitimate business arrangements that benefit consumers and the overall market.
3. Exclusive Distribution Agreement
An exclusive distribution agreement is a type of vertical agreement between a supplier and a distributor or retailer, where the supplier grants exclusive rights to the distributor to sell its products within a specific geographic area or to a particular group of customers. The distributor, in turn, agrees not to carry or distribute competing products offered by other suppliers.
While exclusive distribution agreements are not per se illegal under the Indian Competition Act, 2002, they may be examined by the Competition Commission of India (CCI) to determine if they have an appreciable adverse effect on competition.
If such agreements limit consumer choice, foreclose other distributors from the market, or lead to anti-competitive outcomes, they may be considered anti-competitive and subject to enforcement action by the CCI.
4. Refusal to Deal
Refusal to deal refers to a situation where a dominant firm in the market refuses to supply goods or services to a potential buyer or customer. This refusal can be either direct or indirect and may occur when the dominant firm aims to exclude competitors or restrict competition in the market.
Under the Indian Competition Act 2002, refusal to deal with a dominant firm may be considered abusive conduct under section 4 of the Act. The CCI examines such cases to ensure that refusal to deal does not lead to foreclosure of competitors, harm consumer welfare, or violate competition laws.
5. Resale Price Maintenance
Resale price maintenance (RPM) is when a supplier imposes restrictions on the minimum or maximum resale price at which retailers or distributors can sell its products.
RPM can either be explicit, where the supplier sets the resale price, or implicit, where the supplier uses incentives or threats to influence the resale price.
Under section 3(4)(e) of the Indian Competition Act, RPM is considered an anti-competitive agreement. The CCI scrutinizes RPM practices to prevent price-fixing and promote price competition in the market. RPM can lead to higher prices for consumers and limit the ability of retailers to offer discounts or compete on price, harming fair competition and consumer welfare.
Enforcement of Vertical Agreements
Under the Indian Competition Act of 2002, enforcement of vertical agreements falls under section 3(4) of the Act, which deals with anti-competitive agreements.
The Competition Commission of India (CCI) is responsible for enforcing competition laws and ensuring compliance with provisions related to vertical agreements.
Suppose the CCI finds that a vertical agreement has an appreciable adverse effect on competition (AAEC) in the relevant market. In that case, it can take enforcement actions to address the anti-competitive conduct. These actions may include:
- Imposition of Penalties: The CCI can impose monetary penalties on the parties involved in anti-competitive vertical agreements. The penalty can be up to 10% of the average turnover of the relevant parties for the preceding three financial years.
- Cease and Desist Orders: The CCI can issue cease and desist orders, directing the parties to stop engaging in anti-competitive conduct or practices that harm competition.
- Inquiries and Investigations: The CCI may initiate inquiries or investigations into alleged anti-competitive vertical agreements to determine their impact on competition and consumer welfare.
Conclusion
Vertical agreements play a crucial role in the Indian business environment, influencing how enterprises interact across different supply chain stages.
While the Indian Competition Act prohibits anti-competitive vertical agreements, the exceptions allow for collaborations that contribute to economic efficiencies and benefit consumers.
The Competition Commission of India enforces competition laws to ensure fair trade practices and consumer protection. By striking a balance between preventing anti-competitive behaviour and permitting pro-competitive agreements, the Indian business landscape is shaped to foster innovation, economic growth, and a competitive market that ultimately benefits consumers and businesses alike.
Through carefully evaluating vertical agreements, the CCI continues to promote healthy competition, protect consumer welfare, and facilitate a thriving and dynamic business ecosystem in India.
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