Take-or-pay contract
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A take-or-pay contract is a rule structuring negotiations between companies and their suppliers. With this kind of contract, the company either takes the product from the supplier or pays the supplier a penalty. For any product the company takes, they agree to pay the supplier a certain price, say $50 a ton. Furthermore, up to an agreed-upon ceiling, the company has to pay the supplier even for products they do not take. This “penalty” price is lower, say $40 a ton.
Take or pay contract is very common in the energy industry, in particularly the gas sales.
[edit] Advantages
- Reduces risk to the company's supplier, in return for which they can ask to pay less.
- Reduces a rival’s incentive to come after the company's customers by making retaliation a near certainty.
[edit] Disadvantages
- Increases severity of price war if deterrence fails.
