Posted in Marketing and Strategy Terms, Total Reads: 258
Definition: Horizontal Price Restraint
Horizontal Price Restraint can be defined as a restraint of trade which results from an agreement or collusion among competitors at the same level of distribution and production to fix, raise or control price of goods and commodities in a specific market. It is also done among competitors to control the supply of goods and services. Horizontal restraint for affecting prices is considered illegal.
It is also an agreement made between competing businesses to manipulate competition. Companies who intentionally engage in agreement for horizontal price restraint do so primarily to manipulate prices to enjoy an unfair advantage. In horizontal price restraint competitors want to compete in a less vigorous environment, thus they affect the prices, price formulas, discounts and margins. Companies get involved in horizontal price restraint to minimize competition and reduce output. Horizontal price restraint harms economic well-being of the business ecosystem as well as the customers. There are no social or consumer benefits from fixing prices, it just helps manufacturers. Sometimes there are horizontal agreements that happen when companies in competition decide to sell in allocated territories and no company sells to customers of other company’s territory. With this type of agreement these companies can create a monopoly for their own territory. With this kind of agreement companies have the ability to fix desired prices the businesses that need to buy from them are left with no choice as they are the only one operating in their territory. Horizontal agreement between companies is most dangerous when there are very few companies which dominate the market and they collaborate and leave very less opportunities for other businesses to compete. This domination could be product based or market based.
For example; in Lysine case; the members made a cartel to reach an agreement for allocating sales volumes among them only and agreeing on the prices that would be charged to customers throughout the world. Because of this the prices rose nearly by 70 percent in the first three months itself.