Horizontal and Vertical Agreements Compared

Section 3 divides agreements by the relationship between the parties. A horizontal agreement is between competitors at the same level of the production chain; a vertical agreement is between parties at different levels, typically a supplier and a distributor. The division matters because the law treats the two very differently: four kinds of horizontal agreement are presumed to harm competition, while vertical agreements carry no presumption and must be shown to have an appreciable adverse effect. Identifying which sub-section applies is the first step in every Section 3 question, and often decides it.

1. The Distinction

2. Why They Are Treated Differently

The reason is one of purpose. Two competitors who agree on price, output or territory have removed the rivalry between them, and there is ordinarily no other explanation for the agreement; the arrangement produces nothing and its only function is to raise the return each obtains at the expense of buyers. A supplier and a distributor are not rivals. Their agreement exists to sell a product, and its restrictions usually serve a purpose the law recognises: protecting a distributor's investment in showrooms, training and after-sales service; preventing a rival from taking the benefit of that investment; assuring quality; and avoiding the double mark-up that arises when two firms with market power stand in series.

That is why the statute presumes harm in the first case and requires proof in the second, and why the presumption is framed as a shift in the burden rather than as a rule admitting no answer. Rajasthan Cylinders and Containers Ltd. v. Union of India, (2020) 16 SCC 615 confirms that the presumption is rebuttable, and Excel Crop Care Ltd. v. Competition Commission of India, (2017) 8 SCC 47 shows how it operates where the rebuttal fails.

3. Classifying an Agreement

1. Identify the level at which each party operates in relation to the product concerned. Two manufacturers of the same product are horizontal; a manufacturer and its dealer are vertical.
2. Look at the product, not the firm. A firm may be a competitor of another in one product and its supplier in another, and the agreement is classified by the relationship in respect of the subject matter of the restriction.
3. Dual distribution. Where a manufacturer sells both through dealers and directly to customers, it competes with its own dealers at the retail level while supplying them at the wholesale level. Such an arrangement has both characters, and a restriction that operates on the retail competition between them may be examined as horizontal.
4. Potential competitors. Parties who do not presently compete but would have done so are treated as horizontal for the purposes of an agreement that prevents that competition, such as an agreement not to enter each other's market.
5. Trade associations. Section 3(3) applies expressly to a practice carried on or a decision taken by an association of enterprises or persons, so an association's resolution is treated as a horizontal agreement among its members.

4. Where the Line Is Crossed

Two situations look vertical and operate horizontally, and both have been the subject of recent development.

• Hub and spoke arrangements. Competitors who do not communicate with each other each deal with a common party at a different level, which passes information between them and coordinates their conduct. The vertical arrangements are the spokes; the understanding among the competitors is the rim, and it is the rim that converts a series of vertical agreements into a cartel. Before 2023 the hub could argue that Section 3(3) did not reach it because it was not in the same trade; the amendment now presumes an enterprise to be party to such an agreement where it actively participates in furthering it.
• Resale price maintenance across a market. A supplier fixing its own dealers' prices is vertical. Where many suppliers in the same market impose the same restriction, the cumulative effect may be to remove price competition at the retail level altogether, and the analysis under Section 19(3) must take that cumulative effect into account even though each agreement is separately vertical.

5. How the Two Analyses Run

1. A horizontal case. Establish the agreement, which is often the whole battle, since it must usually be inferred from parallel conduct together with plus factors; show that the parties are in identical or similar trade; place the agreement within one of the four clauses; and leave the presumption to do the rest, subject to rebuttal by the party using the Section 19(3) factors.
2. A vertical case. Define the relevant market; establish the agreement and identify the restraint; assess the supplier's market position, without which the restraint rarely matters; measure foreclosure, including the cumulative effect of similar restraints across the market; and weigh the justification through the beneficial factors in Section 19(3) to reach a single conclusion on appreciable adverse effect.

6. Related Topics and Provisions