Posted in Marketing and Strategy Terms, Total Reads: 304
Definition: Vertical Price Restraint
Vertical restraints are limiting conditions or stipulating terms agreed upon by companies at differing levels of the distribution and production system. An example of a vertical restraint would be a soft drink manufacturing company allowing a restaurant to keep only its drinks for sale.
Vertical restraints are of two types: price and non-price restraints. Non price restraint includes:
a. Exclusive territories or distribution arrangements: The manufacturer gives exclusive rights to distributor to sell in a geographic territory
b. Exclusive dealing: A distributor is prohibited from carrying the brands of competing manufacturing companies
c. Full line forcing: When a distributor is forced to by the entire line of a certain product category from the same manufacturer, thus precluding purchase of other company products
Vertical price restraints primarily involve resale price maintenance(RPM), in which a distributor or reseller (retailer) commits to a certain price of selling the product i.e. the manufacturer sets a fixed price at which a retail shop should be selling its product to the public or at which a distributor should be selling its product to various retailers.
The agreement may involve selling above a certain price floor (minimum resale price) or selling below a certain price ceiling (maximum resale price). If the reseller violates this restraint, either openly or through hidden means, the manufacturer reserves the right to stop transacting with it. RPM usually is relevant in case of branded goods, since non-branded goods are a part of the unorganized market which is difficult to control and regulate for competition.
E.g. Hindustan Unilever fixes MRP for its products to be sold in retail outlets (However Bata selling its own shoes through its owned retail outlets will not come under resale price maintenance)
Minimum RPM prevents cut throat competition on price, which may erode away all the profits for the manufacturer and reseller. Also, distributors investing in promoting the product can recover their costs if the manufacturer decides on appropriate minimum prices to the customer.