Competition Law in Practice
Vertical Restraints: Rules Between Makers and Sellers
How agreements between manufacturers and dealers, such as fixing resale prices or exclusive dealing, can harm competition, with Indian car industry cases.
Competition law is not only about rivals colluding. Agreements between firms at different levels of the supply chain, such as a manufacturer and its dealers, are called vertical agreements. Some of these can harm competition.
Common vertical restraints
- Resale price maintenance: a manufacturer tells retailers the minimum price they must charge, or limits discounts.
- Exclusive dealing: a supplier requires a dealer to sell only its products.
- Exclusive supply: a supplier agrees to sell only to one buyer.
- Tie-in arrangements: requiring a buyer to purchase another product as a condition.
- Refusal to deal: restricting whom a dealer can buy from or sell to.
- Territorial restrictions: limiting where dealers can sell.
Good or bad?
Unlike cartels, vertical agreements can have benefits:
- Exclusive dealing may encourage dealers to invest in training and service.
- Territorial rules can prevent free-riding between dealers.
So Indian law judges most vertical agreements by their actual effect on competition, weighing harms against benefits.
Car industry cases
- In 2019, the CCI penalised Hyundai for imposing a discount control mechanism on its dealers, restricting the discounts they could offer customers, and requiring them to buy certain products from specified sources.
- In 2021, the CCI penalised Maruti Suzuki about 200 crore rupees for a similar discount control policy that limited how much dealers could discount cars, with penalties for dealers who offered extra discounts.
In both cases, the CCI found that consumers lost the chance to get lower prices through competition between dealers.
Spare parts
In an earlier case in 2014, the CCI penalised many carmakers for restricting the sale of genuine spare parts to independent repair shops, forcing customers to use authorised dealers for repairs.
Online sales
Some brands restrict dealers from selling online or on marketplaces. Competition authorities increasingly examine such restrictions.
A customer visits two dealers of the same car brand, hoping they will compete on price. Both offer exactly the same discount. Unknown to the customer, the manufacturer has capped discounts and fines dealers who go further. Competition between dealers has been quietly switched off.
Restricting dealers' pricing can harm competition. In India, such practices are examined for their effect and have led to significant penalties.
- Vertical agreements are between firms at different levels of the supply chain.
- They include resale price maintenance, exclusive dealing and tie-ins.
- They can have benefits, so their effects on competition are weighed.
- The CCI has penalised Hyundai and Maruti Suzuki for restricting dealer discounts.
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