What is the difference between horizontal collusion and vertical collusion?

The main difference between horizontal collusion and vertical collusion lies in the relationship between the firms involved and their positions in the supply chain. Here's a detailed explanation of each type:

1. Horizontal Collusion

• Definition: Horizontal collusion occurs between firms operating at the same level of the supply chain, i.e., direct competitors in the same industry.
• Purpose: The primary aim is to reduce competition among these firms by coordinating strategies such as fixing prices, limiting output, or dividing markets.
• Examples of Horizontal Collusion:
  • Price Fixing: Competing airlines agree on ticket prices for certain routes.
  • Market Sharing: Cement manufacturers divide geographic regions to avoid competition.
  • Output Restriction: Oil companies in a cartel agree to cap production to influence prices.
• Legal Implications: Horizontal collusion is typically illegal in most jurisdictions because it undermines fair competition, leading to higher prices and reduced consumer choice.
  • Example: Antitrust laws like the Sherman Act in the U.S. or EU Competition Law prohibit horizontal collusion.
• Impact:
  • Negative for Consumers: Higher prices, less innovation, and fewer choices.
  • Positive for Colluding Firms: Higher joint profits and stability.

2. Vertical Collusion

• Definition: Vertical collusion occurs between firms operating at different levels of the supply chain, such as manufacturers, distributors, or retailers.
• Purpose: The objective is to coordinate actions across the supply chain to control market conditions, such as limiting resale prices, restricting supply, or excluding competitors.
• Examples of Vertical Collusion:
  • Resale Price Maintenance: A manufacturer forces retailers to sell a product at a minimum price, reducing retail competition.
  • Exclusive Dealing Agreements: A supplier colludes with distributors to prevent them from selling competitors' products.
  • Bid Rigging: A contractor and a subcontractor collude to manipulate procurement outcomes.
• Legal Implications: Vertical collusion is generally treated more leniently than horizontal collusion because it may sometimes improve supply chain efficiency. However, it is illegal if it significantly reduces competition or harms consumers.
  • Example: A manufacturer conspiring with retailers to fix prices can be challenged under antitrust laws.
• Impact:
  • Negative for Competition: Can create barriers for new entrants and reduce competition at certain levels of the supply chain.
  • Neutral or Positive for Consumers: Sometimes improves efficiency or ensures consistent product quality.