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QUESTION

1.Identify and explain what Horizontal restraint of trade is and Vertical restraint of trade from and provide what type of action your example above exhibits. Substantiate your response.

Sample Solutions

Horizontal restraint of trade refers to agreements or practices among competitors at the same level of the supply chain that restrict competition and limit the freedom of businesses to operate independently. It involves actions taken by firms operating at the same market level, such as competitors within the same industry or geographic area. These restraints can include price-fixing agreements, market allocations, and collusion to control or eliminate competition.

For example, let’s consider a scenario where several coffee shop owners in a city agree to set a fixed price for their coffee products. They establish a cartel-like arrangement, effectively eliminating price competition among themselves. This horizontal restraint of trade restricts consumer choice and artificially maintains higher prices than what would exist in a competitive market. It allows the coffee shop owners to collectively benefit from the lack of competition, but it hampers market efficiency and harms consumer welfare.

On the other hand, vertical restraint of trade involves agreements or practices between businesses operating at different levels of the supply chain. It occurs when firms at different stages of production or distribution impose restrictions on each other to control certain aspects of the market. Vertical restraints can include exclusive dealing arrangements, resale price maintenance, and tying arrangements.

For instance, let’s consider a manufacturer of electronics that enters into an agreement with a retailer. The manufacturer requires the retailer to sell its products at a specific price and forbids them from selling competing brands. This vertical restraint of trade restricts the retailer’s freedom to set prices and offer other brands to consumers. It allows the manufacturer to control the distribution channel, maintain brand exclusivity, and potentially limit price competition.

The example above exhibits a form of horizontal restraint of trade since it involves agreements and actions among competitors at the same market level (coffee shop owners) to fix prices and restrict competition.

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