Vertical Agreements and Horizontal Agreements: Understanding the Differences

If you`re in the world of business or commerce, then you`ve probably heard the terms “vertical agreements” and “horizontal agreements” before. These types of agreements are essential to understand because they can affect how you operate your business, your bottom line, and your relationships with other companies.

What is a Vertical Agreement?

A vertical agreement is an agreement between two companies that operate in different levels of a supply chain. For example, a manufacturer might have a vertical agreement with a retailer or distributor that outlines the terms of their relationship. The manufacturer might agree to supply products to the retailer or distributor, and the retailer or distributor might agree to sell those products at a certain price point.

Vertical agreements are common in industries like manufacturing, where a company might need to work with multiple partners to bring a product to market. These types of agreements can help to streamline the supply chain, improve efficiency, and reduce costs.

However, vertical agreements can sometimes be seen as anticompetitive. For example, if a manufacturer has a vertical agreement with a retailer that restricts other retailers from selling their products, this could be considered a violation of antitrust laws.

What is a Horizontal Agreement?

A horizontal agreement is an agreement between two companies that operate at the same level of a supply chain. For example, two retailers might have a horizontal agreement that outlines how they will compete in the marketplace. They might agree to divide up the market between them, or they might agree not to offer discounts beyond a certain point.

Horizontal agreements can be more problematic than vertical agreements from an antitrust perspective because they can limit competition. For this reason, horizontal agreements are generally viewed as illegal under antitrust laws.

The Differences between Vertical and Horizontal Agreements

The key difference between vertical and horizontal agreements is the level of the supply chain they involve. Vertical agreements involve companies at different levels of the supply chain, while horizontal agreements involve companies at the same level.

Another key difference is that vertical agreements are generally viewed as legal under antitrust laws, while horizontal agreements are generally considered illegal. However, there are exceptions to this rule, and it`s important to understand the legal implications of any type of agreement you enter into.

Conclusion

In summary, vertical agreements and horizontal agreements are essential concepts to understand if you`re in the world of business or commerce. Vertical agreements involve companies at different levels of the supply chain and are generally viewed as legal, while horizontal agreements involve companies at the same level and are generally considered illegal. Understanding the differences between these two types of agreements can help you make informed decisions about your business relationships, and ensure that you stay on the right side of antitrust laws.