Horizontal restraints

Definition

Horizontal restraints refer to agreements or practices among competitors that limit competition at the same level of the supply chain, such as price-fixing, market allocation, and bid-rigging. These practices can harm consumers by reducing choices and increasing prices, leading to a violation of antitrust laws designed to promote fair competition.

5 Must Know Facts For Your Next Test

1. Horizontal restraints are considered per se illegal under antitrust laws, meaning they are automatically deemed harmful without needing further analysis.
2. These restraints can lead to significant penalties for companies involved, including hefty fines and damages awarded to injured parties.
3. The Sherman Act of 1890 is the primary legislation that addresses horizontal restraints and aims to promote competition in the marketplace.
4. Horizontal restraints can create barriers for new entrants into a market, as established competitors collaborate to control prices and market share.
5. The Federal Trade Commission (FTC) and the Department of Justice (DOJ) actively monitor and enforce laws against horizontal restraints to maintain competitive markets.

Review Questions

• What are some examples of horizontal restraints, and how do they impact competition in the market?
  • Examples of horizontal restraints include price-fixing, market allocation, and bid-rigging. These practices negatively impact competition by reducing the number of options available to consumers, leading to higher prices and decreased innovation. By coordinating actions at the same level of the supply chain, companies can effectively stifle competition, which undermines the fundamental principles of a free market.
• Analyze how horizontal restraints are treated under antitrust laws and the implications for businesses that engage in these practices.
  • Horizontal restraints are treated as per se illegal under antitrust laws, particularly under the Sherman Act. This means that businesses found engaging in such practices do not have a defense based on potential pro-competitive benefits. The implications for companies include severe penalties, such as fines and possible criminal charges against executives, as well as civil damages for affected consumers. This strict enforcement underscores the importance of maintaining competitive markets.
• Evaluate the role of regulatory agencies in identifying and prosecuting horizontal restraints within industries, and their overall effect on market dynamics.
  • Regulatory agencies like the Federal Trade Commission (FTC) and the Department of Justice (DOJ) play a crucial role in identifying and prosecuting horizontal restraints within industries. They conduct investigations, gather evidence, and enforce antitrust laws to curb anti-competitive behavior. Their actions help preserve market dynamics by ensuring fair competition, fostering innovation, and protecting consumer interests. By penalizing companies that engage in these harmful practices, regulatory agencies reinforce the integrity of the marketplace.

Related terms

Price-fixing: An agreement between competitors to set prices at a certain level, which restricts competition and can lead to higher prices for consumers.

Market allocation: A practice where competitors agree to divide markets among themselves, preventing competition in certain areas or segments.

Bid-rigging: An illegal agreement among competitors to manipulate the bidding process, often leading to inflated prices and reduced competition.