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What are Vertical Agreements and Joint Ventures?

Compliance Knowledge Base | Competition Law

Posted by: Morgan Rennie Published: Mon, 10 Sep 2018 Last Reviewed: Mon, 10 Sep 2018
What are Vertical Agreements and Joint Ventures?

Vertical Agreements are agreements between two or more organisations within a production or distribution chain. Joint ventures are created when two or more organisations come together with the same goal within a given market. Similarly, vertical agreements and joint ventures are both legal when they are conducted in the correct manner. However, if vertical agreements and joint ventures are created with an anti-competitive nature, the organisations involved will be subject to the relevant competition laws which they have effectively breached. If you wish to create a vertical agreement or a joint venture, ensure you do so correctly to prevent penalisation.

Vertical Agreements:

Vertical agreements are the deals created between two businesses which are at different levels of the production or distribution chain, such as a manufacturer and a retailer. Article 101 of the European Union TFEU competition law deals with vertical agreements. It will be decided whether the vertical agreement prevents competition from occurring in the market or breaches any aspects of competition law.

The reason that vertical agreements are treated with caution is because they have the potential to create monopolies and reduce competition in the market. If the agreements are investigated and it's decided that the agreements are done in the best interest of all parties involved and the respective consumers, then the vertical agreement will be regarded as reasonable.

There has been investigation into digital platforms such as Google and Amazon as they have been accused previously of abusing their dominant market positions, but this has been done through creating vertical agreements. Therefore, there can be an anti-competitive nature within the vertical agreements made between these digital platforms. These platform models, such as Amazon which connects consumers to many different retailers, do have the ability to maximise their position to the detriment of their competitors. They can engage in vertical agreements through firstly establishing themselves as the platform but then establishing themselves as a competitor on this platform. Thus, Amazon can present itself not only as a platform which is effectively a marketplace but can present itself as a retailer in this marketplace to the disadvantage of other retailers.

What are Vertical Agreements and Joint Ventures?

Joint Ventures:

Joint ventures are business entities that are created through joining two or more organisations together which have the same goal, such as sharing ownership. Joint ventures can therefore allow the organisations involved to access new markets, to become more efficient through combining assets and to share the risks over two or more organisations when it comes to creating a high-risk investment. The purpose of a business venture usually has a specific goal. Consequently, competition law deals with joint ventures with caution to ensure that this purpose is not to prevent competition from being maintained within the given market.

For example, in 2011 Ford and Toyota agreed to work with one another to develop hybrid trucks. Yet, because this joint venture was transparent, and the purpose of this venture was clearly stated and not anti-competitive in nature, the joint venture was allowed to continue. It is only when a joint venture has an anti-competitive purpose that competition laws and the relevant bodies will conduct an investigation into these ventures.

In 1996 Yahoo Japan was created through the joint venture of Yahoo and Softbank. However, in 2016 Yahoo Japan was separated from the deal which witnessed the huge sale of most of Yahoo to Verizon. Therefore, Yahoo Japan now continues to use this name as part of the licensing agreement. However, in August 2018 the Japanese government opened an investigation to discover whether Apple had conducted anti-competitive behaviour to the disadvantage of Yahoo Japan through Apple encouraging publishers to refrain from working with Yahoo Japan's Game Plus Platform.

Both vertical agreements and joint ventures can be used within business but only when they are conducted in the correct manner and are not anti-competitive in nature. To ensure that any vertical agreements and joint ventures that you conduct are all legal in the business world, knowledge of competition laws is essential.

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