Question

Question is about Competition Law and Policy economic major.

What are vertical restraints? Give three reasons for the existence of vertical restraints.

Answer 1

Vertical constraints are the restrictions over competition between firms and individuals at different levels of production and distribution process. Vertical constraints are in different forms like ranging from requirements that dealer’s acceptance towards the returns of the manufacture products, maintenance of the resale prices or the level of maximum price that dealers charge over manufactures products. The most famous method used here is the resale price maintenance (RPM). Most of the distributor’s market power limited by intra brand competition.
The major reasons for the adoption of these vertical constraints are to limit the number of retailers to ensure the sufficient margin of the earning of retailers. These constraints will reduce the transaction cost between firms and individuals. There is a need of signalling for high quality products in the market and also wished for the signalling of status goods. There is also tried to prevent the free riding problem between the firms within the market. The protection of brand name of that particular firm. This status maintenance will helps to increase the demand in the market.