Advantages and disadvantages of pool organizations

Advantages of pool organizations

The following are the advantages of pool organizations

1. Ease of formation: It can be formed easily without much expense and does not require any raising of capital. The members are not required to pay any fees. It is formed by a simple contract in writing.

2. No fear of over capitalization: The pool does not raise capital and therefore there is no fear of over-capitalization.

3. Autonomy of members: The pool is only concerned with the amount of output, its marketing and division of proceeds. Members continue to enjoy internal autonomy with regard to techniques they adopt, policies they follow etc.

4. Flexibility: Pools are flexible and can adapt to changing situations with regard to business, membership etc.

5. Increases efficiency: The producer is motivated to increase his efficiency. He can enjoy high margins if he improves efficiency and reduces the cost of production.

6. Stability of trade: Stability of prices and trade conditions are ensured in pooling arrangements. Such stability benefits everyone involved in trade.

7. Reduced competition: Competition is reduced to a great extent. This enables the members to focus on improving efficiency in production and substantially reduce their selling expenses.

Disadvantages of pool organization

1. Lack of stability: In a pooling arrangement member units enjoy considerable autonomy and contracts cannot be enforced. Therefore any dissatisfaction among the members results in the collapse of the pooling arrangement.

2. Exploitation of consumers: Pools lead to monopoly situations and it is common knowledge that consumers are exploited in monopolies. Competitors are eliminated and entry of new firms is prevented. Consumers have no other choice but to pay high prices.

3. Inefficiency: Pooling arrangements result in protecting inefficient firms. Prices are fixed at a high level so as to cover the high cost of production of the inefficient units. Therefore firms do not find the need the need to focus on inefficiencies and reduce costs.

4. Non-members benefited: Non-members do not have any restrictions with regard to price, output, discounts, terms of credit etc. Therefore the non-members can devise attractive schemes to attract customers. They can offer lower prices, higher discounts, more credit period and capture the market, whereas the hands of the members are tied.

5. Uncertainty: The quota allotted to members is in relation to the demand. If the demand falls, the quota allotted is less. Members would be forced to reduce production resulting in idle capacity, downsizing of employees and wage cuts. It results in uncertainty and difficulties in managing.