Horizontal and vertical agreements are two types of agreements commonly used in business contracts. The main difference between these two types of agreements is the relationship between the parties involved.
Horizontal agreements are those made between companies that are in the same industry and are usually competitors. The purpose of these agreements is to coordinate activities between competitors to increase efficiency and reduce costs. For example, two airlines may agree to share resources such as ground handling services or maintenance facilities to reduce costs and increase profits.
Vertical agreements, on the other hand, are made between companies that are involved in different stages of the supply chain. This type of agreement is made between a supplier and a customer, where the supplier provides goods or services to the customer. For example, a supplier of raw materials may agree to supply products at a discounted rate to a manufacturer who will produce finished goods and sell them to retailers.
Here are some key differences between horizontal and vertical agreements:
1. Competition
Horizontal agreements are usually made between competitors, whereas vertical agreements are made between companies at different stages of the supply chain. This means that horizontal agreements may face antitrust scrutiny while vertical agreements are less likely to be challenged.
2. Purpose
Horizontal agreements are made to coordinate activities between competitors to reduce costs and increase efficiency. Vertical agreements, on the other hand, focus on ensuring the supply of goods and services.
3. Scope
Horizontal agreements are typically limited in scope, covering only a specific aspect of business operations. Vertical agreements, on the other hand, can cover a wide range of activities from the supply of raw materials to the sale of finished products.
4. Legal risks
Horizontal agreements face more legal risks due to antitrust laws aimed at preventing collusion among competitors. Vertical agreements are generally considered less risky but still require careful review to avoid any potential antitrust issues.
In conclusion, horizontal and vertical agreements are two types of contracts commonly used in business. While they have some similarities, the main difference between them is that horizontal agreements are made between competitors, while vertical agreements are made between companies at different stages of the supply chain. Understanding the differences between these two types of agreements is essential for businesses to make informed decisions when it comes to contracting with other companies.
