Agreement (notion)


Institution Definition

Agreement refers to an explicit or implicit arrangement between firms normally in competition with each other to their mutual benefit. Agreements to restrict competition may cover such matters as prices, production, markets and customers. These types of agreements are often equated with the formation of cartels or collusion and in most jurisdictions are treated as violations of competition legislation because of their effect of increasing prices, restricting output and other adverse economic consequences.

Agreements may be arrived at in an extensive formal manner, and their terms and conditions are explicitly written down by the parties involved; or they may be implicit, and their boundaries are nevertheless understood and observed by convention among the different members. An explicit agreement may not necessarily be an "overt" agreement, that is one which can be openly observed by those not party to the agreement. Indeed, most agreements which give rise to anticompetitive practices tend to be covert arrangements that are not easily detected by competition authorities.

Not all agreements between firms are necessarily harmful of competition or proscribed by competition laws. In several countries, competition legislation provides exemptions for certain cooperative arrangements between firms which may facilitate efficiency and dynamic change in the marketplace. For example, agreements between firms may be permitted to develop uniform product standards in order to promote economies of scale, increased use of the product and diffusion of technology. Similarly, firms may be allowed to engage in cooperative research and development (R&D), exchange statistics or form joint ventures to share risks and pool capital in large industrial projects. These exemptions, however, are generally granted with the proviso that the agreement or arrangement does not form the basis for price fixing or other practices restrictive of competition.

A situation where there is a single (or few) buyer(s) and seller(s) of a given product in a market. The level of concentration in the sale of purchase of the product results in a mutual inter-dependence between the seller(s) and buyer(s). Under certain circumstances the buyer(s) can exercise countervailing power to constrain the market power of a single or few large sellers in the market and result in greater output and lower prices than would prevail under monopoly or oligopoly.

This would particularly be the case when: the "upstream" supply of the product is elastic, i.e. fairly responsive to price changes and not subject to production bottlenecks; the buyers can substantially influence downwards the prices of monopolistic sellers because of the size of their purchases; and the buyers themselves are faced with price competition in the "downstream" markets (see vertical integration for discussion of terms upstream-downstream). Such a situation is particularly likely in the case of purchase of an intermediate product. However, if the supply of the product upstream is restricted and there is no effective competition downstream, the bilateral monopoly/oligopoly may result in joint profit maximization between sellers-buyers to the detriment of consumers. © OECD

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