Page 75 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE

rivals and potential entrants. With advertising, however, such expenses

should be more properly considered an investment in the reputation of the
firm. Moreover, a firm’s reputation may not be limited to the market to

which the advertisement is directed. Thus many firms that have gained a

reputation in one market use it to enter a different market. For instance, firms
with high standing in the fashion industry have used their reputation to move

into other markets, such as perfumes or shoes.
Vertical restraints. Vertical restraints are restrictions that an upstream

firm (for example, a manufacturer or a wholesaler) places on its downstream
firm (for instance, a retailer). Vertical restraints include exclusive territories

(downstream retailer agrees to limit where it sells the product); exclusive

dealing (retailer agrees not to sell rival products); and resale price
maintenance (retailer agrees not to sell below prices established by the

manufacturer). Sometimes they are used together; for example, exclusive

territories may be used along with resale price maintenance. When such
restraints harm competition, it is usually in a standard horizontal context.

There are two ways in which vertical restraints might harm
competition. First, they might be used to support collusion. Second, they

may raise rivals’ costs, thus creating or strengthening barriers to market
entry. Although the second is more relevant to abuse investigations, the first

might also apply. For instance, an upstream firm with a dominant position

might collude with its competitors and use the vertical restraints as
instruments of policing a cartel. At the same time the competitive

environment would have also weakened for retailers.
Vertical restraints can also hurt competition when they raise rivals'

costs. Because vertical restraints can promote procompetitive outcomes as
well as anticompetitive ones, however, it is crucial that competition

authorities make this distinction. For instance, antitrust laws would not be

74