Horizontal Agreement Definition Economics

In the realm of economics, a horizontal agreement refers to a type of agreement between two or more firms that operate at the same level in a particular market. These firms may be competitors who come together to agree on certain aspects of their operations. Such agreements are also known as collusion, and they involve agreements on certain aspects of the market such as pricing, production, marketing, and distribution. In this article, we`ll delve deeper into the definition of horizontal agreement economics.

Horizontal agreements can be beneficial for firms as they help them to coordinate their activities, reduce uncertainty, and increase market power. For example, firms may agree on a minimum price for their products, ensuring that no one firm lowers prices to gain a competitive edge. This can help maintain profits in the market. Such agreements may also lead to increased efficiency in production and distribution, as firms collaboratively work together.

However, horizontal agreements can also be harmful to competition. By colluding, firms may reduce output, raise prices, and allocate markets among themselves, leading to anti-competitive behaviors. These agreements may lead to decreased consumer welfare as pricing may not be reflective of true market conditions.

It is essential to note that horizontal agreements are illegal under most circumstances, particularly if they involve price-fixing, bid-rigging, or market allocation. Such agreements can lead to hefty fines and even imprisonment. Antitrust authorities, such as the Federal Trade Commission (FTC), are mandated to investigate and prosecute such agreements.

In conclusion, horizontal agreements in economics refer to collusive agreements between firms operating in the same market. These agreements can lead to both positive and negative impacts on competition, efficiency, and consumer welfare. While firms may benefit from these agreements, they are illegal under most circumstances and can lead to severe consequences.