Vertical Agreements

A vertical agreement is a contract between two or more companies, where each company operates at a different level in the production or distribution chain. This agreement, or coordinated practice, relates to the specific arrangement being considered. Unlike similar agreements made between companies operating at the same level, these agreements are less harmful in terms of competition law. Their main objective is to improve production efficiency and achieve economies of scale. We can compare vertical agreements to vertically integrated corporations, where a single organization operates across various segments. To encourage competition among economic entities, the European Union has enacted laws regarding the separation of vertically integrated energy corporations. If there is no market power, vertical agreements are less likely to distort competition, unless the supplier or distributor already had significant market power before entering the deal. Inadequate competition at any level of commerce can potentially weaken its viability. By addressing the problem of “free riding” when investing in technological development and staff training, vertical partnerships can also yield positive outcomes. Implementing vertical agreements can reduce the potential for a new company to enter the market and exploit infrastructure or commercial enhancements made by others.