Understanding Horizontal and Vertical Agreements Under the Competition Act, 2002

The Competition Act, 2002 is India’s primary legislation aimed at promoting fair competition, preventing anti-competitive practices, and protecting the interests of consumers. One of its most significant components is the regulation of anti-competitive agreements, which are classified into two major categories: horizontal agreements and vertical agreements. These agreements, depending on their nature and effect, can distort market dynamics, restrict competition, and create unfair advantages for certain enterprises.

This article explores the meaning, scope, legal standards, and implications of horizontal and vertical agreements under the Competition Act, offering a detailed understanding of how Indian competition law addresses collusion and unfair trade practices.

Anti-Competitive Agreements Under Section 3

Section 3 of the Competition Act prohibits any agreement that causes or is likely to cause an appreciable adverse effect on competition (AAEC) within India. AAEC is determined by factors such as:

• Barriers to new entrants

• Driving competitors out of the market

• Foreclosure of competition

• Benefits to consumers

• Improvements in production/distribution

Under this framework, agreements are divided into horizontal and vertical, each treated differently due to their varying degrees of competitive harm.

Horizontal Agreements: A Presumption of Harm

Meaning

Horizontal agreements are entered into between enterprises operating at the same level of the production or supply chain. Examples include agreements between:

• Two manufacturers

• Competing sellers

• Competing distributors

Because they involve direct competitors, horizontal agreements are considered inherently more dangerous to market competition.

Types of Horizontal Agreements (Section 3(3))

Section 3(3) identifies specific horizontal agreements that are presumed to have an AAEC:

A. Price-Fixing

Competitors agree to:

• Fix prices

• Control discounts

• Set minimum resale prices

This is per se anti-competitive, as it eliminates price competition and harms consumers.

B. Limiting Production or Supply

Competitors jointly decide to limit:

• Production

• Supply

• Technical improvement

• Investment

This raises prices artificially and restricts consumer choice.

C. Market or Customer Allocation

Competitors divide markets based on:

• Territory

• Product lines

• Consumer groups

Such arrangements eliminate competition in designated segments.

D. Bid Rigging and Collusive Bidding

Enterprises coordinate during tenders to manipulate outcomes, often inflating prices and harming public procurement.

Presumption of AAEC

Horizontal agreements listed under Section 3(3) carry a presumption of illegality. Once such an agreement is proven to exist, it is assumed anti-competitive unless parties prove otherwise.

Key Case Example

Excel Crop Care Ltd. v. CCI (2017) – The Supreme Court confirmed penalties for bid-rigging in a tender for aluminum phosphide tablets, emphasizing that such collusion harms public interest.

Vertical Agreements: Evaluated on a Rule of Reason

Meaning

Vertical agreements exist between enterprises operating at different levels of the supply chain, such as:

• Manufacturer → Distributor

• Wholesaler → Retailer

• Supplier → Franchisee

Unlike horizontal agreements, vertical agreements are not presumed harmful. They are evaluated based on their actual impact on competition.

Types of Vertical Agreements (Section 3(4))

A. Tie-in Agreements

When the purchase of one product is conditioned upon buying another. Example: A refrigerator manufacturer requiring buyers to also purchase its brand of stabilizer.

B. Exclusive Supply Agreements

Restricting a buyer from purchasing goods from competitors, potentially foreclosing market access.

C. Exclusive Distribution Agreements

Reserving certain territories for specific distributors, affecting inter-brand competition.

D. Refusal to Deal

Imposing restrictions on whom an enterprise can trade with. This can harm competitors or restrict consumer access.

E. Resale Price Maintenance (RPM)

A supplier dictating minimum resale prices to dealers. RPM is increasingly scrutinized as it restricts pricing freedom.

Evaluation Standard

Vertical agreements are judged using the Rule of Reason, meaning their anti-competitive effects are weighed against their potential benefits For example, exclusive distribution may enhance efficiency and improve service even if it restricts some competition.

Key Case Example

Fx Enterprise v. Hyundai Motors (2019) – CCI held that resale price maintenance through mandatory discount restrictions constituted an anti-competitive vertical agreement.

How CCI Determines Appreciable Adverse Effect on Competition (AAEC)

To determine AAEC, the Competition Commission of India evaluates:

Factors Indicating Harm

• Barriers to market entry

• Driving competitors out

• Foreclosure of competition

• Price increases or reduction in consumer choice

Factors Indicating Benefits

• Improvements in production or distribution

• Promotion of technical development

• Better consumer services

Horizontal agreements usually fail this test due to inherent harm, while vertical agreements may pass if they improve market efficiency.

Penalties and Consequences

The Competition Commission may impose:

Monetary Penalties

• Up to 10% of the average turnover of the enterprise

• For cartels, up to three times the profit of each year of collusion

Cease and Desist Orders

To stop anti-competitive practices immediately.

Invalidation of Agreements

Anti-competitive clauses can be struck down.

Personal Liability

Directors or individuals involved may face penalties.

Why Regulating These Agreements Matters

Strong enforcement against anti-competitive agreements:

• Ensures fair pricing

• Encourages innovation

• Enhances consumer welfare

• Promotes healthy market competition

• Prevents abuse by large enterprises

• Supports smaller businesses

  
  

In today’s rapidly digitizing markets, e-commerce, telecom, and pharmaceuticals, the scrutiny of horizontal and vertical agreements is increasingly critical.

Conclusion

Horizontal and vertical agreements under the Competition Act, 2002 represent two distinct dimensions of market behavior. While horizontal agreements between competitors are presumed harmful due to their potential to distort market competition, vertical agreements require careful examination to determine their impact on market efficiency and consumer welfare.

With India’s growing economy, diverse markets, and evolving digital ecosystems, robust enforcement of these provisions is vital for maintaining competitive neutrality, fostering innovation, and protecting consumer interests. As businesses innovate through digital platforms, supply chain integration, and cross-border collaborations, understanding the legal boundaries set by the Competition Act becomes not only a compliance necessity but a strategic imperative.