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SMEs require vertical restraints in presence of rising e-commerce

In a report published today by the Competition and Markets Authority, Oxera presents primary evidence on how vertical restraints between manufacturers, retailers, and distributors are affecting small and medium-sized enterprises (SMEs) in the UK. The CMA commissioned Oxera to undertake the study in order to better understand the rationale behind businesses using vertical restraints with their trading partners, and how the use of such restraints has been affected by the growth of the Internet as a marketing and sales channel.

Vertical restraints: new evidence from a business survey’ shows that, although vertical restraints have the potential to reduce competition, many of them can have positive effects on consumers by ensuring that product and/or service quality remains high, and by increasing product availability. Therefore, the report provides support for the pro-competitive effects of such restraints, as highlighted in the economic literature.

The report presents the results of a qualitative survey of 33 mainly small and medium-sized businesses, undertaken jointly with market research company, Accent. The survey focused on vertical restraints such as selective distribution, quantity forcing, single branding, and other price-related practices. It considered why businesses use such restraints, which types are most common and in which types of market, and the impact of the restraints on different market players. The survey also explored how the growth of the Internet has affected the use of these restraints.

While the results are not based on a large enough sample to be representative of UK businesses as a whole, they do show that vertical restraints are appealing because they provide manufacturers and retailers with the necessary incentives to deliver consumer benefits such as offer of product range and free in-store customer advice. These incentives are particularly important in the presence of increasing competition from online sales.